Two major tax reforms the government should see through

There’s been some promising chatter in the run up to next week’s Budget about two major changes to our tax system, both of which have often been talked about across the political spectrum and both of which politicians have previously ended up shying away from because of the political hurdles involved.

First is integrating income tax and national insurance. As The Independent reported,

The move is expected to be signalled by George Osborne in his Budget next Wednesday. Although such a huge change would take years to implement, the Chancellor is determined to be seen as a reformer and not just as the axeman who cleared the budget deficit he inherited from Labour.

The idea has been under discussion for years, but politicians have shied away from implementing it. Such an upheaval would be bound to create winners and losers, and the effective abolition of national insurance – currently at 11 per cent for employees, rising to 12 per cent next month – could be portrayed as a tax hike, taking the basic rate from 20p to 32p and top rate from 40p to 52p in the pound…

The proposed merger would be welcomed by small businesses. A survey of them by the Treasury’s Office of Tax Simplification found almost unanimous support for the idea. In its interim report this month, the office said the two parallel systems distort behaviour as people…

A study by the Institute for Fiscal Studies last year said: “The current UK tax system is opaque and unnecessarily complex, imposing two entirely separate taxes on earnings – income tax and national insurance contributions.”

This reform could make for a much simpler tax system that is cheaper to run, is more accurately administered and makes for a better relationship between level of income and level of tax.

The downsides are that technically it is complicated to do, with likely controversy in the short-run and political benefits deferred until sometime in the future. It’s easy to see why politicians have backed away in the past.

But now that the contributory principle behind national insurance is anyway long since eroded, it is still the right policy to aim for.

So too is having a greater share of local government’s income raised locally. Thus far the government has given local government greater control over what it spends – which is good – but without also greater control over its income, that is always going to hobble meaningful devolution of power and responsibility.


Eric Pickles has today set out a vision of ‘self-funded’ councils that keep their local business taxes with reduced central grant dependence.

Again, this is an area where political heat has made many politicians back away from reform. But it’s also the right thing to do and local business taxes should be the start, rather than the end, of reforming local government finance.

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  • Liberal Neil 18th Mar '11 - 3:47pm

    Combining Income tax and NI wouldn’t necessarily raise the rate to the total of the two, because income tax is levied on a broader base than NI.

    The implication of this is that combined rate could be lower, or the threshold higher, and at the same time shift the burden of taxation from earned to unearned income.

    There would be some losers, but there would be fewer of them and they would typically be better off people.

  • Tony Greaves 18th Mar '11 - 5:09pm

    The problem with the business rate is that it is the main means of distributing money from richer areas to poorer areas. So if you reform that on its own you risk yet another redistribution from the poorer/disadvantaged areas to the rich/less needy areas. This is what has already happened in the local government settlement this year.

    Be very wary indeed of what Pickles is up to.

    Tony Greaves

  • “Be very wary indeed of what Pickles is up to.”

    Something Lib Dem councillors already know. Pity those around Clegg still don’t get it.

  • Philip Rolle 19th Mar '11 - 12:27am

    I wonder whether we will also see some amendment to the private residence rules to restrict elections, or “flipping”.

  • Hmm.. combining Income Tax and NI seems a bit like a rerun of Gordon Brown’s abolition of the 10% tax band, for people on low incomes.
    Gordon’s move ended up with a pensioner with a full state pension plus a small private pension, say £1000 over the tax threshold, paying a high marginal rate as tax on the state pension was clawed back. Taxing a low income person at a high rate than a banker on his/her “capital gain” bonus does not seem to be the right way to go.
    This merger would only be fair, and seen as fair, if the personal allowance rate was some way above the above level of income from working full time on the NMW.
    It would be much simpler to just keep jacking up the rate for the personal tax allowance. There are lots of interactions at the bottom end of the income scale.

  • Tony Greaves is right. This is another example of the coalition using pious rhetoric (helping the poor, setting councils free, and so on) in defence of policies which will actually increase unfairness and inequality.

  • Old Codger Chris 20th Mar '11 - 11:01am

    Whatever else George Osborne does, if he can set the ball rolling on integrating income tax and national insurance (and if it can be achieved without the usual cock-ups associated with govenment IT projects) he will be remembered as the Chancellor who finally bit the bullet on something that should have been done 50 years ago.

  • The two things regarding tax which I think should be dealt with –

    1) Re-instate the 10% Tax band

    2) Bring in the £10,000 Tax threshhold sooner rather than over a period of five years.

    If they do either (or, better still, both) of those things then they might just have a chance of restoring the electorate’s confidence in the Government. At the moment it is at an all-time low and sinking fast!

    They are “Talking the Talk”, now let’s see them “Walk the Walk” because if they don’t our Party will be finished and will never ever again see seats in the Cabinet even from a distance!

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