The knights who say NI

Sunday National, 5th September 2021.

Magicians call it misdirection. Pickpockets too. Keep your audience’s attention fixed on what your right hand is doing, and they won’t notice the left one, slipping into their handbag. Income tax policy in the UK follows the same logic. These days, the main function of income tax bands is to convince the British public they are paying out less of their earnings to the exchequer than they truly are.

For decades, Westminster politicians have boasted about bringing down or holding income tax bands steady. And for decades, National Insurance rises have been the preferred stealth tax of successive Labour and Tory governments. Just like magic.

This is reflected in the numbers. The Treasury forecast they will take in £128 billion from VAT during this tax year, £198 billion from income tax, and a whopping £147 billion from national insurance contributions. You’ll know this from your own payslips. An employee earning £20,000 this year will pay around £1,250 in national insurance contributions on top of their income tax liabilities. Folk earning £40,000 will pay just north of £3,650 in NI this year. It’s an income tax by any other name, but pretending otherwise is just too convenient.

Politicians from Blair through to Johnson make headline-grabbing promises not to raise income tax, and as night follows day, they find stealthy ways to increase the claims the state makes on your earnings. In 2002, Gordon Brown raised national insurance contributions by 1% to support increased NHS spending. New Labour’s 1997 manifesto cannily – or you might think, cynically – foresworn any increases to the basic or top rates of tax. As chancellor, Alistair Darling borrowed the wheeze in 2009, and George Osborne gave effect to it the next year. You might sympathetically describe this as doing good by stealth, increasing public spending without provoking popular hostility, but in the end, it is still a kind of fraud on the public. The fact sections of the public want to be deceived is scant mitigation.  

You can blame this succession of fudges on the political wisdom which says that the great British public won’t wear any increases in their headline income taxes under any circumstances. We’re content to pay out more of our income, so long as we don’t notice we’re paying more, and can continue to live in the fantasy number land that the basic rate is 20%.

This approach assumes people’s heads button up backwards, but this cynicism may be justified. National insurance contributions have the advantage of better PR than income tax rises. Many people still think NI is a ring-fenced fund held in trust for future generations while public spending is powered out of other levies.

But it isn’t. NI contributions dissolve into general taxation to pay the state’s ongoing bills for the NHS, social security and pensions. An income tax hike is sure to prompt a bad press. A friendly boost to your national insurance contributions stands a better chance of passing the workers of the United Kingdom by, largely undetected and unresented.

At least, that’s what the UK government has its fingers crossed for. All the talk at Westminster this weekend has been the government’s imminent announcement of how it intends to fund changes to social care in England and Wales. Of the many levers available to it, including raising income tax, the government seems to have aligned on national insurance as the most palatable way of bringing in the money.

Boris Johnson’s immediate problem is political. The Tory Party’s 2019 manifesto committed not to “raise the rate of income tax, VAT or National Insurance” during this parliament. The excuse “but Covid” may go some way in convincing its voters that the pandemic has changed the politics of taxation and what the Tory-voting public are willing to from their government. The cabinet is reportedly divided on the numbers. Some contend a 1% rise should do it. Sajid Javid is holding out for 2%. Jittery Tory MPs are leaking, briefing, and counter-briefing and showing every sign of trying to get their retaliation in first about who is to blame for this potentially unpopular policy.

There’s also the peculiar features of NI which trouble traditional Tory worldviews. In the language of Conservative politics, national insurance contributions are often presented as “tax on jobs,” because they hit not only workers but their employers with extra employment costs. And because self-employed people pay lower NI contributions than employees, this can result in employers dreaming up schemes to casualise their staff in a bid to avoid these liabilities. It all smells like the kind of Brownite budgetary chicanery which the party used to denounce during the 2000s.

But the main grief this policy is rolling into is its rampant intergenerational unfairness. As the Resolution Foundation point out, the policy will “unjustifiably place the burden on the young and low earners” while sparing older and wealthier voters.

Why? Because once you reach the state pension age, you don’t have to pay a penny in national insurance, even if you are still working full time and on a good wage. A penny on NI would cost a thirty-year-old earning £29,500 just under £200 a year on top of their existing tax bill. For a twenty-year old taking in £20,000, the cost will be just over £100 in increased contributions.

 But for someone over 66 – like at least 68 Members of Parliament – earning £81,932 a year? They’d pay zero. Zilch. Nada. Raise the cash by way of income tax, by contrast, and all of these honourable members would be obliged to contribute their fair share. Another problem is the kinds of income which national insurance hits. Unlike income tax, NI falls only on your work-related earnings. Older, wealthier people with extensive portfolios of investments, dividends, or rental income wouldn’t pay a penny more, leaving younger workers to foot the bill. 

The generational inequities of this speak for themselves. A classic bit of Tory policymaking, shoring up the base in its existing social and economic advantages, while pushing the burdens onto the unloved youngsters the right-wing press spends so much of its energies slagging off.

One point which has been consistently missing from the metropolitan analysis of the pros and cons of the UK government’s policy are the implications for devolution and the potential political fallout. Think about it. Westminster sets income tax rates for England and Wales. The Scotland Act empowers the Scottish Parliament to set its own bands, and these have been tracking in a different direction for some time now. Lower-income workers in Scotland benefit from a starter rate of 19% on earnings between £12,570 to £14,667. The higher rate is now 41% north of the border compared to 40% in England and Wales.

But, but, but – national insurance is still reserved to Westminster. As a consequence, it is Rishi Sunak rather than Kate Forbes who decides who the levies land on, and how much of their earnings the state claws back. What the UK government is effectively proposing to do is to hike taxes on workers in Scotland, in a regressive and inter-generationally unfair way, to fund English social care policy.

And because raising English income taxes to fund English public services is deemed too politically embarrassing for this Tory government, Scottish workers on modest incomes will have to part with hundreds of pounds to pay for it, while wealthy voters in England who stand to benefit from the changes make no contribution at all.

It doesn’t matter if some of the Barnet consequentials eventually find their way into Holyrood’s coffers. These UK government proposals aren’t just transparently socially unjust. They’re a constitutional absurdity.

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