employees falls from a rate of 13.8%<\/a>\u00a0 to just 2% when earnings exceed \u00a341,865 \u00a0a year. \u00a0This means that as earnings rise above this point the overall percentage rate of contribution paid by a higher earning employee falls as a part of income.<\/p>\nSecondly, National Insurance is regressive because it only applies to earned income. That means that if a person can live off investment earnings, or they can recategorise their earnings as investment income, as many self-employed people do by recording their income through a company and then pay themselves dividends, then national insurance is not paid and this has the result of making this particular tax in some part in voluntary, and in another part a tax only on labour, and not on capital. Both factors suggest that that the tax is already deeply unfair when every member of society benefits from the tax paid. \u00a0If, therefore, any tax was to be hypothecated, National Insurance is definitely not the one to use.<\/p>\n
That said though, I have a real problem with hypothecation \u00a0in any event. There are, as is usually the case with me, a number of reasons for this \u00a0but the most important one by far is that, as a matter of fact, \u00a0governments do not raise tax for its own sake. They have only ever, throughout history, raised tax because they wish to spend. \u00a0It makes no sense to raise tax for its own sake: that process would simply take money out of the economy for which a government was responsible to make everyone worse off (which is also why running budget surpluses is also quite illogical). Given that running a tax system always gives any government grief, no one would do it just to make their population worse off, and so it is only the act of spending that justifies taxation.<\/p>\n
The supposed philosophy of a hypothecated tax is, however, that a government cannot spend until it can raise money, but in fact this is the wrong ordering of events. \u00a0Again, throughout history, governments have proved that they can spend without raising taxation. They can borrow, of course (and the present government has turned this into an artform) and they can print money, as the UK government did from 2009 to 2012, during which period \u00a0it issued debt of \u00a3426 billion and repurchased about \u00a3375 billion of debt, \u00a0meaning that in net terms it borrow just \u00a351 billion, and \u00a0effectively printed money to cover the rest. \u00a0Hypothecation, then, denies this fundamental truth that \u00a0the ability to raise money is not a precondition of government spending it. It is therefore premised on a falsehood, and that's never a good basis for taxation.<\/p>\n
But the problems only get worse the longer one thinks about hypothecation. If we can agree that in the chicken and egg scenario of tax and spend then it was always spend that came first, and tax was the way in which once upon a time kings tried to reclaim the cost of their wars, and now governments try to reclaim the cost of their commitments to their electorates, then to pretend that spending on the NHS is dependent upon raising tax is simply wrong. The spend comes first. The tax comes second. Hypothecation gets this completely the wrong way round. It's as fundamental a mistake as most people and politicians make about the way money is created, and has to be put right.<\/p>\n
What is more though, to pretend that this particular spend on the NHS is dependent upon raising tax from a particular group in society \u2014 who are are those who by and large earn less than average, and \u00a0those who by and large have lower savings, \u00a0and who are, therefore, in the main, those to whom wealth and income should be redistributed - \u00a0is little short of absurd. \u00a0If it is spending that has the priority in any government's agenda (and that must be true) then because no one raises tax without there being a spending priority, then it is ridiculous to raise a tax in a way that contradicts the spending priority inherent in the commitment to the NHS.<\/p>\n
And, as a matter of fact, that spending commitment to the NHS is about redistribution; it is about the creation of equality; it is about overcoming disadvantage; it is about equal access for all, and it is \u00a0about making available to all what would otherwise only be available to some (as the USA proves). And yet, the form of hypothecation that is being chosen achieves the exact opposite result. Those who can already afford \u00a0healthcare, come what may, will not suffer any significant burden as a result of this additional hypothecated tax and yet those to whom income and wealth should be redistributed will bear additional costs \u00a0right down to, and including, those who might not even pay income tax. \u00a0Nothing about that makes \u00a0micro economic sense, or sense in the context of any form of social justice.<\/p>\n
Nor however does this make any sense in macroeconomic terms. If spending comes first, as I believe has always been the case with regard to government, then tax has never been about raising revenue, as such. Tax is, instead, about re-claiming the cost expended by government for \u00a0a number of reasons. \u00a0The first, and very straightforward reason for reclaiming that expenditure by tax is to make sure that the government's currency is used as the medium for exchange in the economy which it regulates, and this happens because it demands settlement of tax liability in that currency, thereby making sure that it is the primary medium for exchange in use in the economy, which then, vitally, lets it spend using that currency as the way i can undertake is own spending. Without tax its currency might have no use in the economy, which may decide to use another currency instead e.g. US dollars, and the government could not then spend as it wishes.<\/p>\n
Second, the decision as to how much to spend is key to fiscal policy. Deficits have been vital for two purposes. One is economic stimulus and the second is keeping inflation going - which is, again, vital to prevention of recession. So tax is not decided upon to cover spend, it is only reclaimed to the extent considered necessary to keep the macroeconomy going in the right direction.<\/p>\n
And third, tax is used to reinforce the social policy \u00a0inherent in spending decisions. So, it is used to reprice goods and services that the market gets wrong, and it is used to redistribute income and wealth. These are vital roles and in the process tax represents the choice that is available in a democracy, which is perhaps its greatest merit.<\/p>\n
Hypothecation, in contrast, puts forward the pretence that we are in the market and that we can only have what we can pay for. This has, quite simply, never been true of government, and never need be true of government, precisely because it can print money, and precisely because it has to run deficits \u00a0to keep the economy moving in a direction where recession is avoided, full employment is the aim, and sustainability is aimed for in a way consistent with both. \u00a0The very logical of hypothecation is, in that case, in contrast with the principle of universality \u00a0on which the NHS was founded.<\/p>\n
The Labour Party is making a mistake if it backs hypothecation. It's making an even bigger mistake using NIC for that purpose.<\/p>\n
Labour does need to reclaim more of the spending it will make in the economy: that much may be true. But if it is then it is the tax gap it needs to tackle. This is could do. It should not raise NIC.<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
Reports suggest that Labour is considering hypothecated national insurance increases to pay for additional NHS spending during the next parliament. I have to admit I
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