A simple tax system is a pillar of any long-term strategy for growth. This is why I was delighted by the pre-Budget rumours of the possible merging of NICs with income tax.
As David Martin outlined in Abolish NICs : NICs are complicated, create perverse incentives and are by and large used in the same way as other government receipts.
And whilst moving away from the complex current model would be perhaps too much to hope for soon, there is growing feeling that the long benefits of simplification are significant.
Having read the detail of what George Osborne actually said about the proposed consultation, I am somewhat disappointed:
- The Chancellor talked about merging the operation of NICs and income tax, but appeared to rule out the abolition of a contributory principle
- He ruled out extending NICs to individuals above state pension age
- And he ruled out extending NICs to other forms of income such as pensions, savings and dividends
This effectively means that the Chancellor has ruled out the most radical simplification option before the process of consultation has even begun.
There are of course reasons why he might do so: it is always politically difficult to burden pensioners; keeping savings and dividend income free of NICs would help to maintain incentives to save; and there is a case for a social insurance system.
But the contributory principle is very weak these days - particularly with the upcoming changes to the pension system. And part of the reason for wanting to simplify tax is to eliminate tax avoidance. Excluding savings and dividends means it would remain difficult to prevent people converting labour income to capital income in order to avoid tax.
Another problem, highlighted by Paul Johnson at the IFS, is that the Chancellor is not extending to NICs the principle of increasing the personal allowance:
“Instead, along with other tax thresholds, the point at which NI starts to be paid will now rise more slowly in future, no longer rising in line with the RPI but rather linked to the (generally lower) Consumer Price Index. The gap between the point at which people start to pay NI and at the point at which they pay income tax will grow.” This seems an odd thing to do at a time when you’re thinking of committing to integrate the two.
However, there is hope. The fact that a consultation is happening at all grants the opportunity to convince the Chancellor of the points made by both the IFS and David Martin. A full merging of the two taxes would be a fantastic first step in radically overhauling our complex system of taxation. Let's hope George will listen.