There are widespread reports this morning that the Tories are planning at least a one per cent increase in national insurance to fund an increase in spending on the NHS of an equivalent amount. To describe a policy so poorly thought out as ill-conceived is to be overly polite. Let me point out some of the flaws.
First, this increase is not needed. The government can already afford to fund the £10 billion the NHS needs, with ease. I explained how here.
Second, the government does not need to raise any taxes to pay for increased funding for the NHS because the multiplier effect of additional NHS spending is high enough for such spending to pay for itself. Again, I have explained why.
In other words, the government simply does not need to adhere to the logic that an increase in spending must be funded. It did not follow that logic for £37 billion of track and trace funding that it is now admitted had no notable impact on the management of the coronavirus crisis, but which did massively line government cronies' pockets. So why is this tax increase required? The answer is solely about politics. Rishi Sunak wishes that people should be punished for wanting more NHS spending.
That word ‘punishment' is deliberately used by me. NIC is a deeply regressive tax. As the government's own table of rates, allowances and reliefs makes clear, the tax targets those on lower pay. The charge starts on income below the income tax threshold. It is cut drastically on income above £50,268 a year. It is, therefore a deeply unfair tax already.
But worse are the exemptions from the tax. The retired, however well off they might be, do not pay it.
NIC is not paid at all on unearned income, whether from interest, dividends, rents, trusts or other sources.
And those with the means to manipulate their income - as many self-employed people with their own companies have been able to do - can avoid large parts of their NIC liability.
So, this is a tax on those in paid employment above all else.
This means that this is a tax on those most likely to be least able to afford a tax increase in this country.
It will hit those on very low incomes suffering cuts in Universal Credit and facing increased fuel poverty very hard.
And the wealthiest will not pay a penny more. You could not make up a tax outcome this bad however hard you tried.
Of all the tax options the government could have chosen this one is the worst. So why are they doing it? I actually genuinely think it is to punish. The punishment is on those who have not opted out of the NHS with private medicine. The Tory logic is that the wealthy will have done this - so they should not pay. Except, of course, in an emergency no one opts out of the NHS.
So, if this is the wrong tax increase, and assuming there had to be a tax increase (which as I noted above, need not be the case) then what should have been chosen?
I have listed many options for increasing tax on the wealthy, including these:
- There is significant room for wealth taxation in the UK
- The UK could tax wealth more
- The relationship between income, wealth and tax
- The TACS approach to wealth taxation
- Reforming taxes on wealth by equalising capital gains and income tax rates
- The need for an investment income surcharge
- Capping total ISA contributions
- Abolishing the personal savings tax allowance
- Restricting pension tax relief
- Abolishing higher rate tax relief on gifts to charity
- Reforming council tax
Let me elaborate on just a couple of the more obvious candidates. The first would be taxing capital gains at income tax rates. Notionally that would bring in over £9 billion in tax and still only bring the average capital gains tax charge to just over 30% when it is only 15% now. Allow for some behavioural change and such a move would easily bring in more than £5 billion a year. Cut the annual capital gains tax allowance - as social justice would demand - and the figure could be very much more.
Then there is an annual investment income surcharge. Annual investment income declared in the UK in the last year for which data was available was £92.3 billion. This does not include pensions. Two thirds of this sum was dividends. If around £40 billion this sum was exempt from any additional charge because it went to those with total income under £30,000 a year and the rest was subject to an investment income surcharge of 15%, equivalent to an approximate NIC charge, then £7.8 billion of additional tax would be due from this group - more than covering Sunak's desired additional income.
So, with two simple changes I could fund dramatically more than the sum that Sunak is seeking from those with the ability to pay who are currently undertaxed instead of from seeking more from the lowest paid who currently pay much higher rates of tax than do those with investment income.
So why is Sunak proposing what he is? Simply because he holds most of the people of this country in contempt. There is no other explanation. And worse, he is doing that for no good reason at all.
Worse though is this fact: making such a charge on these least able to afford it will increase demand on the NHS. That is how perverse this charge really is.
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“the government does not need to raise any taxes to pay for increased funding for the NHS because the multiplier effect of additional NHS spending is high enough for such spending to pay for itself.”
As I understand MMT, this sentence should read
…..the government does not need to raise any taxes to pay for increased funding for the NHS because there is no potential demand pull inflation problem at this time.
Whether or not the multiplier effect is high enough to “pay for itself” isn’t really the point.
Yes it is
MMT is one part of a bigger picture
Fanatically thinking it answers all questions is harmful
I’m not an economist so I’m not expressing a firm opinion either way. However, I was under the impression that you were of the MMT school of thought which holds that taxes, and I think we all agree that NI is a tax in all but name, are levied to give a value to the currency and prevent inflation rather than “pay for” Government spending.
MMT is a very useful explanation of some aspects of the economy
But it does not answer all questions and there still is a multiplier
Just because I own a hammer does not mean I do not need a screwdriver
I would think you more serious were you to punctuate replies properly. I did like your article.
Try dealing with the volume of traffic I do and do a day job.
Frankly, your pedantry does not become you
@ Richard,
I don’t think anyone is suggesting that MMT is a perfect cure all but a theory is a theory. It is either right or it isn’t. Theories can’t be compared with hammers and screwdrivers to be used, or left in the toolbox, according to the job at hand.
So “How are you going to pay for it?’” Last year you were this answering with” so long as the creation of government debt keeps pace with inflation and it does not overheat the economy by trying to create more than full employment then government debt is not a problem ..” Which is straightforward MMT theory I would say.
Now you are saying that increased spending produces increased revenue, which is true, but is giving a different answer to the same question. The underlying assumption being that the increased revenue will “pay for it”.
https://www.taxresearch.org.uk/Blog/2020/04/03/answering-the-question-how-are-you-going-to-pay-for-it/
Both are true
Deal with it
Just as both screwdrivers and hammers are useful is true
Politics is about choosing the best of the right instruments available at any point in time
That’s not theory
That’s reality
Again deal with the fact that’s the world – and what concerns me
Theorists who don’t get that quickly become a menace, even if their ideas have substance
MMT does say, though some do not recognise it, that Tax is just as important as Spend. While Tax does not ‘Pay For’ any specific Spend, it is also true that the State must collect Tax that is close to equalling Spending. Otherwise the value of the currency is not maintained, people are not forced to use it and the collective responsibility of society needed to sustain a democracy is damaged. If we are below Full Employment the State should run a deficit. If at Full Employment then a balanced budget, if over Full Employment and inflation becomes problematic then run a Surplus.
As Richard has argued forcefully and at length then Tax is just as effective (or can be) at achieving policy aims as spending. For example high tax on tobacco.
Now instead of raising National Insurance on those earning less than £50,000 if the Tories want to change NI then why not abolish the Upper Earnings Limit? At the moment the FTSE 350 CEO only pays 2% NI, while the rest of us pay 13%. And of course it is only charged on wages and not e.g. share options, pension contributions and dividends.
Most FTSE CEOs will be subject to income tax and NICs on their share options, if they get shares with a market value in excess of the amount they pay for the options (on grant and on exercise). A small amount of options might be tax advantaged (SIP, SAYE, etc) in the same basis as other employees but most won’t be, and listed shares are readily convertible assets. But yes, only 2% NICs above the upper earnings limit, plus 13.8% for the employer. Subsequent gains on the shares face only 20% CGT with no NICs.
Pension contributions are not particularly efficient once a person reaches the lifetime allowance.
Dividends are paid to all holders of listed shares pari passu, so not really a way of directing rewards at CEOs. But the rate of income tax is lower, and no NICs.
A NICs rate increase is pretty useless for the reasons you have outlined, but there are potential tweaks to the national insurance system that could be a good idea, such as removing the upper earnings limit on employee contributions, or extending to the under 16 and those past state pension age.
As for a 1% increase, in the negative column, you could add the headline manifesto commitment signed by a certain Boris Johnson:
“I guarantee … We will not raise the rate of income tax, VAT or National Insurance.“
https://www.conservatives.com/our-plan
They are calling it a new levy to get around that
Do they really think we are stupid?
“Except, of course, in an emergency no one opts out of the NHS.”
This was really brought home recently when Prince Phillip was treated at one hospital but, when his condition needed better care, he was shipped to the NHS. Only to then be returned to private care for rest & recuperation.
“Rishi Sunak wishes that people should be punished for wanting more NHS spending.” More likely, I’d think, it’s a targeted assault on poor people calculated to make them even poorer, the aim being to reduce their standard of living to next to non-existent so they’ll welcome the workhouse when it returns in the new Charter Cities/Free Enterprise Zones/ZEDES/GENNS/Freeports or whatever they’ll be calling themselves. This explains too the wholly unnecessary reduction in Universal Credit, this right at a time when unemployment is set to rocket (damaging the economy even further) which will further impoverish the already impoverished, and also the continuing throttling of housing benefit which will soon, in the next few years, mean the creation of a whole class of families who can’t afford (as the money is deliberately withheld by their government) to rent anywhere at all in the UK. Where will they live? I suspect the plan is for them to occupy the workhouses in the new Freeport manufacturing centres, where people will work for bed and board rather than wages thus enabling manufacturers to compete with China for costs. We can expect to see manufacturers around the globe to be taking an interest in this experiment soon.
I don’t think you should rule out the other option as to why Sunak seems to be going this route: he doesn’t have the first bloody clue what he is doing.
It would certainly follow his performance during the pandemic. Beginning with the worst policies and eventually changing them to something more reasonable when it became clear that they were totally bloody useless.
Very good.
I agree about the hammer and screwdriver being needed.
But if I were fighting this, I’d just tell people that the Government just wants ordinary people to pay for Covid – that’s it – something that was never really their fault. And is that fair, given that we bailed out banks? Shouldn’t the public be bailed on Covid? And BREXIT? Both have been created or exacerbated by Tory politicians.
Contempt? Angry words.
Sunak to me is just like most people who can afford to have a swimming pool and tennis court added to their property.
He’s just supremely ignorant that’s all and has not got a clue about how anyone can live on less than he lives on. He’s also caged by the same thinking that has dominated Government since Thatcher, as well as the faulty logic of the economists who made up the Mont Pelerin Society before her.
Rishi has to face the fact that he is ‘Marie Antoinette’ of British Chancellors – for that’s what he is.
Very cogent critique, as always, Richard; thank you. Can you confirm that for years, NI contributions received by government have not been invested directly into the NHS, as was originally intended? That they have been used to try and pay off the National Debt? Surely, if they just started using our NI money for the NHS, that would release more funds for social care?
NIC is just a tax
The idea it pays for the nhs or pensions is just a convenient facade that is not actually true
But it is not used to pay off the national debt as that has not happened at all for twenty years
There was no NHS when NICs were introduced in 1911, although admittedly the NHS and broader benefit system today are miles from the limited contributory health and employment benefits the “stamp” initially secured (themselves modelled on contributory benefits introduced in Germany in 1884 by Bismarck – intended as a bribe to the working class to maintain his power, intending to bind them into his conservative and authoritarian policies with a state-controlled brand of “state socialism”). There have been significant reform from time to time, particularly in 1948, of course.
As I understand it, from 1948, a small part of NICs receipts have been (and still are) earmarked as funding for the NHS, and the rest earmarked for social security benefits.
Annual benefit expenditure is around £220 billon, NHS spending is around £150 billion, and NIC revenues are around £140 billion. Some 2016-17 breakdowns here: https://obr.uk/forecasts-in-depth/brief-guides-and-explainers/an-obr-guide-to-welfare-spending/
Any “surplus” of NICs sits is accounted for in the National Insurance Fund. Here are the 2019-20 numbers. https://www.gov.uk/government/publications/national-insurance-fund-accounts That shows about £110 billion of NICs revenues for GB (excluding NI) after the NHS contribution is deducted, so that looks like about £30 billion are earmarked for NHS funding (neatly, about 20% of NICs “pays” for about 20% of the NHS, but in reality taxes including NICs all disappear into one large bath, and you can’t really tell where each £1 of NHS funding comes from – taxation, or normal bond issuances, or QE, or NICs, or whatever) .
And then the accounting shows about £104 billion of expenditure – almost entirely about £99 billion on state pensions, plus £4 billion of (contributory) ESA.
Any notional surplus is “invested” in government debt – the Debt Management Account, which pays the base rate, currently next to nothing. Or to put it another way, as this FOI says, it is “in practice, used to reduce the national debt”. https://www.gov.uk/government/publications/national-insurance-fund
So the so-called accounting is entirely notional. There is no “fund”. It is all government spending, government money, government debt.
Thank you
Call it sham accounting, in summary
A timely and powerful post, Richard. I am sharing it as widely as I can, with encouraging reactions. Could there be another factor behind this, and the unforgiveable UC cut? Could the regressive mandarins at the Treasury be bringing a lot of pressure to bear, to defend against the growing realisation that the myths of “tax funds spending”, “balance the books”, and “borrowing” are fallacies?
I suspect that is not their concern
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