Amongst the recommendations made by IPPR in its report published yesterday , on which I have already commented, and which has apparently been embraced by Labour was one that said:
The National Insurance Fund should be given institutional and financial independence from government, with a responsibility for ensuring that national insurance contributions are sufficient to finance contributory benefit entitlements over the long term.
I have massive reservations about this for a number of reasons.
First, let's be honest: NIC has not funded all benefits for some time, as is clear from this budget view:
That means that the first argument is about what is, or is not, covered by the National Insurance fund, and that in itself creates a permeable membrane which could be the basis for political argument for decades. That is a complete distraction when one is not needed.
More importantly, and secondly, this does however suggest that there could or should be a ring fence around benefit spending. This has the inherent risk within it that benefits will be cut to be within the NIC yield. That would be seriously bad news for those in need in this country, especially if a government decided that cutting NIC was necessary to create 'growth' or 'economic stimulus'. The prospect of one part of the labour movement being set against another is all too obvious as a result of this policy.
Thirdly, let's be clear about NIC: it is only paid by working people. Yes, I know that there is what is called an employer's contribution but as someone who has employed a fair few people in my time I will tell you that this is the one and only tax where the incidence is clear even to an employer, and it is emphatically on labour. When an employer takes someone on they have a budget to pay them and that includes employer's NIC. The wage paid is adjusted to allow for that so in practice the whole cost of this contribution, like it or not, falls on the employee.
But that's enormously worrying if benefits are in any way to now be linked to such contributions. It means capital in the form of company profits does not pay. And it means that capital in the form of investment and rental income does not pay. It means consumers do not pay. And it means those with wealth to pay capital gains tax and inheritance tax do not contribute. Instead this becomes a tax where those in work provide for those out of work and there is no redistribution at all from those with wealth to those in need. That is absurd. If one of the fundamental reasons for having a tax system is the redistribution of wealth and capital to those who need it then this policy fails from the outset.
I hope IPPR thought about all this. If they did not this needs to go back to the drawing board straight away because this is one policy that plays very horribly into a right wing agenda that I find deeply unattractive.
There are answers of course. First, the idea that there is a national insurance fund, let alone one that is independently managed, has to be scrapped. It is another example of politicians walking away from responsibility.
Secondly, as Howard Reed and I have argued, there is merit in the idea of merging tax and national insurance if the objective is merging tax and the benefits system.
Third, without going that far there is an obvious need in the tax system to create horizontal equity by charging investment income, rental income, and even capital gains tax to an equivalent of National Insurance with a small annual allowance available, simply for the purposes of easing administrative burdens. Pensioners may also be exempted in some cases. This surcharge, which would not be dissimilar to the investment income surcharge scrapped by Margaret Thatcher in 1984, could yield useful source of income, but as importantly, would prevent distortions which currently exist in the system.
Finally, the whole idea that providing a social safety net is a burden should be consigned to history. Labour has simply got this wrong.
But, right now if Labour thinks a national insurance fund is an answer, then it is seriously mistaken
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I think the idea of ringfencing NICs is crazy. The previous Labour govt had it more right when Brown raised NICs in 2002 to pay for the NHS, ignoring the issue of contributory benefits completely – NICs are just one part of the tax take, and the question is how large that absolute tax take should be. I would argue that we need a substantial increase in overall taxation to reverse most of the cuts since 2010. And, if they were a genuinely progressive outfit, that’s what IPPR should be saying as well. But of course they’ve capitulated to George Osborne’s austerity politics like most of the rest of the Labour party.
In general I think contributory benefits are flawed – most of the people who need financial assistance most in our population are people who have been least able to make a contribution – children, pensioners with little employment history or who were low paid through their working lives, disabled people and the long-term unemployed. They are the 4 groups which a contributory benefit system helps least. That’s why successive govts have moved away from the contributory principle since 1948 – because it doesn’t do an effective job of redistribution.
Agreed
I have woken up to a bright sunny day but with a creeping feeling of doubt easing its way into my very being. The cause is Labour. I have been and always will be a Labour supporter but the lack of the big idea as you call it is so apparent. This tinkering is not going to fix the dire straits we are in and the prospects are starting to look very bad. A contemporary analogy would be that of an England football supporter knowing there are problems but hoping that they are finally solved only to see the truth unraveling and harsh reality setting in that they are just not up to the task.
I don’t want to join in the witch hunt against Ed but his performance lacks conviction as do his front bench. He has an open goal if you excuse me carrying on the comparison with England football, but fails to score and disappoints all his faithful followers.
The IPPR document is not the basis for a radical change in Labour strategy and sadly looks like another gimmick to a lot of people. He may surprise us but that feeling of unease is growing daily and he needs to up his performance and his team game before we are all sent for an early bath.
NIC is paid by people under State Retirement Age. Most of the money is spent on those over it
NICs currently pay for the state pension plus. All of this is needed for a decent pension – and probably plus. For this reason NICs could be hived off for pensions – bring back SERPS. This makes perfect sense since pension contributions should come from wages. Most of income tax could be hypothecated to health – which would then make it almost popular.
I should start by agreeing wholly with Howard Reed’s assertion that contributory benefits are flawed, for the same reason he gives.
I also note his clearly stated view that taxes should rise. You, however, Richard opined two days ago that QE would not be inflationary unless and until the economy had reached capacity, which the economy presently wasn’t anywhere near. You further agreed with commentators who argued that inflation – as opposed to hyper-inflation – wasn’t a bad thing.
Given also your statement that gov’ts don’t actually need to raise tax to fund expenditure, (I think you actually mean “don’t NECESSARILY need…”) do you agree that there isn’t actually any requirement to raise taxes at present?
I have answered that question endlessly, already
It always seemed strange to have effectively 2 income taxes, but one doesn’t apply to the retired, and has different bands and if i recall nat insurance is weekly but income tax is monthly. perhaps a tradeoff is to combine them, but have bands of say 20%, 40% 45% as now for those under retirement and 15%/35%/40% for those in retirement with the difference being used for the pension. that way wealthy pensioner still contribute more than poor working age people but the payment for pension/health provision is clear and would make understadning ones tax easier.
The rates would need to be much higher http://classonline.org.uk/docs/2013_Policy_Paper_-_Richard_Murphy__Howard_Reed_(Social_State_-_Idleness.pdf
Will such a fund just collect tax and ring fence it? Or is the plan to have it invest and generate returns?
Surely the ponzi scheme that is paying for today’s pensioners from today’s contributors needs to be fixed; as the population ages this can’t go one surely.
And what will you do in the transition from one scheme to another? Make no pension payments? See how that goes down
No, I agree its all screwed. As with Madoff, the pyramid will come crashing down at some point, at the moment politicians are just kicking the can down the road. Better to be voted into power in 5 years than worry about where the country will be in 50 years.
I keep seeing National Insurance described as a Ponzi scheme. So often that it is obviously an “off the shelf” phrase, especially since the english for this is “pyramid scheme”.
I do not see how the national insurance arrangements resemble a pyramid scheme, no matter what else is wrong with them. Can you explain the similarity to me, please
There is none
NIC is not a Ponzi scheme as the money is guaranteed. In a genuine Ponzi scheme, there is a scramble to find the money to keep the Ponzi, or pyramid scheme going.
Banking more resembles a Ponzi scheme.
Take a look at the treatment of the social security fund in the US, then you’ll know why the NI fund is a very very bad idea!!
Would it be more feasible if the existing ceiling on NI contributions was lifted, and NI applied to the entire wage no matter how large, including bonuses?
Does not captures other income sources – but yes, it should be done
Yes merge NI & PAYE and charge capital gains & other income to the same marginal rate & minimize deductions.
Then raise the taxfree limit until we have minimum wage untaxed and further so we can encourage people back into the workforce.
Given the cost of private rents we need to realise that reducing taxes can only help so far.
Why not a miminum income guarantee? Subject to UK citizenship and full disclosure & worldwide taxation income & assets.
No actually, we’d need to refuse personal allowance and pay a guaranteed income to all