The Office of Tax Simplification has recommended merging national insurance and income tax.
This proposal, first mooted as long ago as 1943, has been kicked around by various chancellors. Nigel Lawson gave it serious consideration in the 1980s, Alistair Darling thought about it for a while and George Osborne launched a consultation in 2012. Will we finally get some action?
On the face of it, the arguments seem clear. National insurance – which dates back to 1911 – no longer covers the costs of the benefits it was set up to finance. It misleads the public, who still seem to imagine state pensions are paid from a fund accumulated from past contributions.
National insurance is complicated, with rates and cut-off points that don’t match up with income tax rates and bands. It’s costly to administer. It creates discontinuities in effective marginal tax rates which can have a disincentive effect.
In the early days national insurance payers were a distinct group from income tax payers: prior to WWI there was no overlap. Today most workers pay both imposts: net pay is what counts.
The system involves employer and well as employee contributions, again a bit of a fiction, since the incidence ultimately falls on employees.
On grounds of transparency, then, merger is sensible. It would create cost savings for employers and government. Moreover, if a new consolidated income tax rate was applied, it could be applied to the self-employed, those working after state pension age and pensioners, redressing some inequities and increasing the tax base.
That of course points to one danger. There would be winners and losers: if older people – who are more likely to vote – lost out, there might be electoral consequences.
Another problem is that scrapping NICs would mean that there would be no distinction between those who had paid contributions, and thus were entitled to higher benefits, and those who hadn’t.
Unless the level of contributory benefits was cut, the welfare bill would rise. If welfare spending was kept at the same level, benefit rates would have to fall for people who had been paying in for many years.
Furthermore, with the current concerns about migration, scrapping NICs might mean new migrants would be entitled to the same benefits as longstanding residents. Not what David Cameron has been chasing round Europe for.
There are ways round these problems, but they would not be quick or easy to implement.
If George Osborne bites the bullet on this he may go down as a great reforming chancellor. But he may also scupper his chances of becoming Prime Minister, given the likely furore in the short to medium term. I can’t see him doing it.