I have posted this threat to Twitter this morning:
The idea that national insurance should pay for the increased cost of social care for the elderly is hideous. It reveals that the government does not know how tax works, how the economy functions, or how tax impacts inequality. A thread……
The Times has reported that the government is planning to increase the national insurance paid by both employers and employees to pay for the UK's social care crisis. As tax decisions go, this one would be terrible.
It's true that we have a social care crisis in the UK. Just as we need more healthcare, education, police, justice services, environmental protection and much more, so do we also need more social care.
Ultimately, the government has to at some time decide that what the people of this country needs is not more takeaways, nor more mobile phones, or gambling, alcohol or television channels, but is instead fundamental public services.
All public services are paid for in the same way. The government decides to provide them. It passes a budget to approve the spending. And using the authority of Parliament the government then tells the Bank of England to pay the resulting bills.
The Bank of England will then always pay whatever the government commands it to do. It simply advances the funds required to the government on overdraft. It has a legal obligation to do so. It cannot say no.
The government then has a decision as to what to do with the overdraft. It can clear it with tax. It can borrow. It can create new money using quantitative easing. And it could, although it's choosing not to do so, leave it on overdraft, which it calls the Ways and Means Account.
So, the first thing to note about tackling the social care crisis is that the decision to spend is not dependent on the ability to raise tax to pay for the cost. To pretend that's the case is false: like more than £300bn of spend in the last year it could be paid for with QE.
Or the government could borrow. Or simply run a cost free overdraft with the Bank of England. There are choices. And right now, there's no evidence that any of these non-tax options will create inflation. Borrowing might even reduce inflation in asset prices e.g. shares.
I make the point to make clear that the decision to tackle the social care crisis is independent of any decision on how to clear the overdraft that doing so will create for the government and the Bank of England. To pretend otherwise is false.
But if the government chooses to tax, why use national insurance? The UK tax system can and should be used to shape society in the UK for the advantage of all who live here. It should, in itself, be used to tackle social problems.
We have a social care problem, but we also have a problem with a shortage of well-paid work, businesses under cost pressure because of the Covid crisis, and with massive inequality which has been fuelled by the government deficits over the last year.
It seems it is not widely understood that every pound of government deficit does, by definition, increase private wealth by an equal amount. It has to. After all, someone has to get the pound that was created and not taxed back. A private person does.
More than £300 billion has been pumped into the economy by way of government deficit spending in the last year. Thank goodness for that. It kept the economy going. It was essential. But it has meant that the wealthiest in the UK are now a lot wealthier.
So, now the government wants to tax, knowing these facts. And what it's deciding to do is in the face of them increase national insurance charges to pay for a social care crisis.
National insurance is a deeply regressive, and very unfair tax. It starts being paid when a person earns just over £9,500 a year (worked out weekly). Income tax is not paid until a person earns the equivalent of £12,570 a year. That's the first unfairness.
Then national insurance is charged at 12% on the employee and 13.8% on the employer (which is a cost that economists agree effectively comes out of wages, so it's really paid by the employee). That's a combined tax of near enough 25.8%, higher than basic rate income tax.
Add on to that the fact that national insurance largely stops, by falling to 2%, when wages reach £50,268 a year (current rates), and the tax suddenly looks very far from progressive.
In other words, what the government is going to do is ask those on the lowest pay to suffer a tax increase to pay for social care. It will, in real terms, charge those on higher pay less as a proportion of their total discretionary income.
It will ask vulnerable employers to pay more. That threatens smaller business in particular. It also encourages more tax evasion.
And the young will pay more to subsidise the old when the young already get a pretty poor deal on everything else in life, from paying for their education that those in retirement never did, to facing higher house prices, onwards.
Now consider the alternatives. I'll mention four, but there are more. These all leave those on lowest incomes alone. They all target wealth - where we know the capacity to pay has gone up most. And they don't harm employment.
First, equalise the tax rate on capital gains tax and income tax. Why should capital gains be taxed at rates that are often half those that would be paid on income? Capital gains tax is paid by the wealthy: they should be taxed more to tackle inequality.
Second, reduce the capital gains tax annual allowance. Why should the wealthy who have capital gains get two annual allowances of tax free income a year when the rest of us get one? This bias in their favour should be eliminated, or reduced dramatically.
Third, reintroduce an investment income surcharge. This is an additional tax at 15% on investment income due because there is no national insurance paid on interest, dividends, rents and other investment incomes.
Because national insurance is not charged on investment income the tax rate due on it is massively less than that due on work. That is absurd, and socially wholly unjust. Why should the wealthy pay much less tax than everyone else?
A 15% additional tax on investment income existed until about 1985. Reintroduce it, giving a higher allowance to pensioners if need be, and recreate social justice.
And fourth, cut the massive subsidy - costing over £10bn a year - on the pension contributions of some of the wealthiest in society. Why should the savings of the wealthy be so heavily subsidised when there is a need for social care?
Add all those up - or just do some of them - and the supposed £10bn required to pay for social care is readily available without ever hitting the least well off, the young, the employed and small employers hard, which is what the government plans instead.
What is more, the problem of excess wealth is tackled, and some of the supposed inflation pressure in the economy - which is being created largely by the wealthy - will also be reduced.
The government need not tax if it wants to pay for additional social care. But if it decides to do so it must tax in ways that ensure that social justice is delivered. National insurance cannot deliver social justice. My suggestions can. Why are they getting this wrong?
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Agree that it is madness. From my perspective, plugging higher labour costs into cash flow forecasts further reduces the attractiveness of the UK, especially as capital intensive/ labour light investments already favour the mainland.
Employer NICs remain at 13.8% above the upper earnings limit, so if you are including it in the 25.8% payable below the upper earnings limit, you should say the effective rate above the limit is about 15.8%.
Still regressive though. And not paid on gains, or interest or dividends. Not paid by those past state pension age or under 16, however much they work or earn.
The only reason to increase NICs is that many people seem to resent paying their “stamp” less than other taxes.
If my back-of-the-envelope calculations are right then Employer NI is currently effectively more like 7% for higher rate earners because it displaces other taxes.
(13.8+40+2)/(100+13.8)-(40+2)/100=0.070
(I’ve ignored Apprenticeship Levy.)
I do agree that this is the worst proposal they could feasibly have come up with.
I post this without checking because I am pushed for time…..
Well, it depends what you mean by tax burden, but as it is a payroll tax payable by the employer in addition to the headline earnings, it is effectively 13.8/(100+13.8) = 12.1% for everyone.
More to the point, basic rate taxpayers have 20% income tax but 12% NICs on their earnings, whereas higher/additional rate taxpayers have 40%/45% income tax plus 2% NICs. So the tax rates on earnings (ignoring employer NICs) are not 20, 40, 45, but 32, 42, 47.
That could change if the government abolishes the 2% rate above the upper earnings limit (itself introduced, initially as 1%, in 2003) and imposes full 12% employee NICs on higher and additional rate income, as was done for employer contributions in 1985.
Your suggestions are entirely correct…. and pretty clearly so.
They get it wrong as they attempt to square the competing objectives of satisfying (a) the tide of voter opinion that “something must be done” (b) not upset their constituency of older, wealthier voters and donors.
Add to that their absurd contortions over keeping manifesto pledges (when every other “promise” is broken) and you get a ridiculous policy. Are we surprised? Unfortunately, no.
If National Insurance were to be abolished and the tax base shifted fully onto Income Tax, would you still recommend a levy on the employer or set a progressive scale for them to pay in some way?
I have recommended a totally differenmt tax – a progressive consumption tax on flows through bank accounts
Tax bank accounts?? That is a sure fire way to get alienate voters
Flows through bank accounts is what I said
Recognised economic taxation experts have shown that a financial transaction tax would be the most inefficient form of tax, why do you not acknowledge this?
Recognised tax experts tend to be in the pay of those who want to shift tax onto the lowest paid
Um, isn’t a financial transactions tax meant to be economically inefficient? Throwing a little sand in the gears, to slow down the churn?
Compare 0.5% stamp duty on shares, which is also terribly “inefficient” from an economic perspective, but raises a lot of cash very cheaply. It raises several billions a year and it costs a small fraction of a penny to administer for every pound collected.
That’s the original Tobin tax logic, now described as the Spahn alternative
As you note, not true of all of them
Touche!
Also worth pointing out that unlike Income Tax, National Insurance is ‘per job’ so I could have two part time jobs earning £9500 each and pay nothing unlike someone else earning £19000
Agreed
Maybe it’s just me, but I have found this discussion confused because two different issues have been mixed.
(1) Taxes need reforming. Most readers of this website will agree since that is what is is mainly about, the clue is in the name. But it isn’t helpful to repeat those arguments when the issue is how to adjust taxation for a new spending need, starting from where we are.
(2) If there is to be any sensible state funding of social care in old age, there is likely to be a tax implication. My understanding, mostly obtained from this website and some links provided, is that to avoid inflation governments will ultimately need to remove money from the economy to roughly the level that creation of new money exceeds the resultant increase in actual economic activity. So some fraction of money created to deal with the urgent need for decent social care will need to be recovered in tax. The question is how to do that given the way taxes are structured here and now; it is a cop-out to say decent social care can be delayed until after the politics is right for tax reform.
For what it is worth, I think it is actually politically convenient there is a fiction linking National Insurance (which is to all intents and purposes a tax like any other) to state provision of health and social care. That could be exploited by increasing NI revenue by progressive means: for example extending NI (perhaps at a different rate) to pension income, and dividend income, and capital gains income.
You re actually suggesting merging NI and income tax as far as I can see, plus cgt maybe
If you are talking tax reform, yes I would like a common tax regime covering all movement of money into current account income – whether it be NI plus income tax on salaries, tax on capital gain being realised, or tax on income derived from wealth assets (e.g. share dividends, property rent). But I have no idea if that is feasible, and I come to this website to learn more and be stimulated on the subject.
But given that National Insurance exists, and people accept it psychologically as an “insurance policy” to look after major health needs, support in the case of unemployment or disability, and a basic income in old age – then pragmatically it makes sense to exploit that to move ahead with the urgent need for decent national provision of social care. Assuming some additional taxation is required to prevent an inflationary consequence of the increased money created by government, it seems to me it could be more politically acceptable to describe it as part of National Insurance; but rather than adding to the burden on current payers of NI instead apply it to other forms of income in order to at least begin to address the disparity in tax rates.
There would be an element of deception involved in making look like a hypothecated tax – though that has been the fiction of National Insurance since its introduction – but I would accept that. After all you have convinced me that taxes don’t “fund” government expenditure as such, so there is never hypothecation in any meaningful sense, but are a downstream consequence of government creating money to do anything.
But NI is not what you describe, and its impact is deeply regressive so it should not be used to pay for social care
Just watched this on NewsNight. It is so dismaying to see bullshit arguments like I saw tonight and some tossed talking about focus groups.
Totally agree with all the above.
A point apparently missed so far is that the lowest paid, who would be hit hardest by NI increases are also the least likely to have to pay anything towards social care costs. So they are being made to pay more to allow those with more income to pay less.
[…] week I wrote a Twitter thread on why national insurance should not be used to fund social care. I reposted it on the blog, but it was a quiet day for reads here; relatively speaking the issue was not well […]
Totally in agreement with RM’s post.
As a side issue I always understood that changing direct taxes required a Paliamentary vote on a Bill whereas changing NIC can be done by Stat Instrument with no interference by democratic vote which is why NI has never been abolished or subsumed into Income Tax.
Government tax rate plans are never changed by parliament