This Budget is Osborne’s chance to simplify tax and defend globalisation
There are two threads – one general, the other highly specific – which I should like to see weaved into the fabric of the chancellor’s Budget statement today. First, a clear defence of globalisation and, second, firm action towards the long overdue merger of income tax and National Insurance.
Despite what purists might regard as evidence to the contrary, the chancellor is at heart an old-fashioned believer in free markets and enterprise. His instincts are internationalist. In office he has relentlessly made the case for the UK as a hub for global trade. Nevertheless, public sentiment has become increasingly hostile to the doctrine of globalisation, which seemed to have swept all before it following the collapse of communism in 1989 to 1991. Even the IMF concluded in a report last year that lower global economic growth was accounted for by the tendency for the benefits of globalisation to be unduly skewed towards a privileged, highly-educated global elite.
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This perception matters. Globalisation was the crowning glory of the triumph of capitalism in the last decade of the twentieth century. A threat to the reputation of the former will impact on the latter. Conservatives need to stand firm amid the ugly re-emergence of class war rhetoric and the politics of envy in the Corbyn/McDonnell era. We also need to recognise that, for increasing numbers of our instinctive supporters, the rules of global capitalism seem to work against their interests. The deep sense of unease even for many middle class Britons gives way to frustration, and worse, when they find that, despite studying, working and saving hard, the quality of life their parents took for granted is beyond their grasp. Incidentally, this is why HMRC’s apparent leniency over Google’s tax treatment caused such a stir; the damaging perception remains that there is one rule for global corporations, another for the man and woman in the street.
In short, such people now are dismayed as they regard themselves to be among the losers in the apparent lottery of global capitalism. This lies behind the chancellor’s ambitions to extend the principles of a living wage to provide secure, well-paid employment to much of Middle Britain.
So while the Opposition is in disarray, now is arguably the ideal moment to reassert the primacy of markets, capitalism and globalisation – a creed that lies in stark contrast to the interventionism, resentment and egalitarianism of those on the Left.
On a more technocratic note, the chancellor might, just might, start the process of aligning National Insurance with income tax.
Last year he charged the Office of Tax Simplification with examining the feasibility of this ultimate of Treasury holy grails. Quietly, stealthily, National Insurance Contributions (NICs) raise an unfeasibly large amount for the Exchequer: this year £115bn; by 2020-21, £153bn. This is as much as the combined take for fuel duty, business rates, council tax, capital gains tax and inheritance tax. NICs raise virtually two-thirds as much as income tax. Yet raising rates or thresholds in National Insurance, most famously in 2002 in order to fund higher health spending, allows for unpalatable increases in the effective rates of income tax.
The myth persists that NICs accrued over a working life are ringfenced in a personalised fund paid by employers and employees for health and pensions. This has its uses, not least for those on the political left. After all, a merging of income tax and NICs would formally break the link between contributions and benefits; arguably, once taxpayers no longer had any reason to believe they were deriving an individual benefit from “their” accumulated contributions, it would surely only be a matter of time before a tax-cutting chancellor was emboldened to shrink the state.
Nevertheless, there is increasing pressure from businesses, large and especially small, disgruntled at the complexities and expense of administration that cloud the entire tax and benefits system. A streamlined, simplified set-up would be far easier and cheaper to handle. Collection of NICs and income tax involve different government departments and computer systems; the former depend on weekly earnings, the latter is based on annual income. Pensioners and those under 16 years of age do not pay NICs and nor, in full, do higher earners on their entire income.
Aligning this is an unexciting, technical exercise, but would be the first step towards a merger of the dual regimes. Watch out during this year’s Budget speech and in the years to 2020 for an indication that the Treasury intends to align the starting points for paying NICs and income tax, which has become an article of faith for many supporting a living wage.
In time, further alignment of higher rates of the twin taxes would allow for a single earnings tax, presumably banded at the current rates of income tax (likely the temptation to levy a combined tax at or above 50 per cent is one only a future Labour chancellor would relish).
George Osborne has often spoken of a desire to simplify a highly complex UK taxation regime. Merging income tax and NI would streamline the system and aid transparency; it would also be a genuinely revolutionary change for a long-serving chancellor presumably keen to secure his legacy… in this role at least. [custom id="135"]