UK tax updates
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The author, a former permanent secretary of the Treasury, is a visiting professor at King’s College London
Managing public finances is a Sisyphean task. But this weekend, the British Treasury is celebrating a tax hike of a magnitude not seen this century.
To me, that reaffirms two former axioms. First, no matter how much politicians resist the inevitable, structural increases in public spending must ultimately be paid out of taxes. And second, once the chips are off, governments will always use their addition to national insurance contributions.
In the first 75 years of the 20th century, the size of the British state rose relentlessly. That changed in the mid-1970s. Inflation has attracted more and more workers to the income tax net. Cuts by the IMF have led to disillusionment over what taxpayers receive in return. Politicians have begun to approach tax from a more managerial perspective.
It has become fashionable for some time to increase value-added tax. But it is based on the inability of successive conservative chancellors to persuade parliament to expand the VAT base. And in any case, both ministers and treasury officials began to realize that contributions to national insurance were less unpopular than income tax or VAT.
The idea was in the name. Voters have linked national insurance to good things like the NHS and the state pension. While this was not entirely true – the national insurance fund is clearer than the real one – the treasury was only too happy to take advantage of this peculiarity of taxpayer psychology.
The main rate of national insurance paid by employees has more than doubled since 1977, from 5.75% to 13.25% from next April, while the basic income tax has been reduced from 34% to 20%.
But the problem with national insurance is that it is only paid on labor income. It is not payable on investment income, whether dividends or rent. It is paid only by those under the age of state pension. And the rate paid decreases as earnings increase, as opposed to the progressive structure of income tax.
To the chancellor Rishi Sunak’s honor, he tried to resolve some of these errors with the proposal for a health and social care levy. The levy is payable on dividends and pensioners’ earnings. But rents will remain exempt. A tax paid by a pensioner who supplements her meager income in a supermarket but not by the landowner who rents from his tenants is probably fair.
But there is another reason why successive governments have preferred national insurance over income tax increases. Employers also pay national insurance, and governments are generally rapidly reflecting an increase in the rate of employees in the rate paid by employers. The latter will also increase by 1.25 percentage points from next April and reach a rate of 15.05 percent.
Taxes on employers are politically easier. They do not have many voices. But employers’ national insurance is a tax on work. Tax more work and you get less of it.
Sunak has announced more than £ 40 billion in tax increases this year, of which almost two-thirds are borne by the company in the form of higher corporate taxes and national insurance. It may be good politics, but at a time when Brexit has made it more important than ever for the UK to be business-friendly, it’s almost certainly a bad economy.
And that takes me to one last axiom. For the past 50 years, there have been many “radical reform” budgets. Tax rates have risen and fallen, new taxes have been created, old ones abolished. But during this period the tax survey was stubbornly stable. No chancellor has managed to get tax receipts above 34.1 percent of national income. Sunak’s announcement presupposes a tax survey that has not been seen since the days of post-war austerity. Forgive me for thinking this might still be a lie.