Debate Magazine
Allister Heath talks sense for a change: It would be great if Ben Gummer, the Tory MP for Ipswich, gets his way. He wants national insurance contributions (NICS) to be renamed the earnings tax. This would be a far more accurate way of describing a little-understood levy. NICs were originally promoted as a contributory, state insurance scheme: in return, people were entitled to benefits, including the state pension. But the cash handed over is not like a contribution to a funded retirement scheme, or even a normal insurance policy: it is simply another tax, the receipts of which are spent immediately by the government on general expenditure. NICs have therefore become downright deceptive, making it harder for households to understand how badly they are being clobbered by HMRC. To make matters worse, NICs are dishonestly divided into an “employees” bit (at 12 per cent and two per cent) and an “employers'” share (13.8 per cent on almost all pay). In reality, as most economists would agree, there is no difference: employees pay all of it. The forces of supply and demand determine workers’ total cost; the fact that some of this is made up of wages and some non-wage costs makes no difference. If employers’ NICs were abolished, wages would eventually rise commensurately. So-called employers’ NICs are a stealth tax on workers. The total tax bill on wages, salaries and bonuses, including income tax and all NICs, is shockingly steep. Earnings above £7,717 face 12.1 per cent; this increases to 22.7 per cent from £7,769; then to an astonishing 40.2 per cent from just £9,440. The tax rate then spikes punitively to 57.8 per cent from £41,450; fortunately, that is merely a weird aberration and tax dips back to 49 per cent from £41,558, where it settles; eventually, it explodes to 66.6 per cent from £100,000 before falling back to 49 per cent from £118,880. Earnings above £150,000 face a cumulative tax rate of 53.4 per cent. It’s time some clarity were injected into our hopelessly complex tax system. It's just a shame that he didn't squeeze in a mention of the extra high marginal rates for many lower earners, i.e. benefits withdrawal, working tax credits withdrawal and student loan deductions. And unfortunately he ignores VAT. He appears to have succumbed to the delusion that this is a tax on "consumption" not "production" and of course his beloved banking and residential construction sectors are either VAT exempt or zero-rated. If you treat VAT more correctly as a tax on "value added", the bulk of which is wages, those marginal rates for people in the productive sector all go up by about ten percent*. * assuming that an employee gets all the marginal extra income from a sale, the customer pays £100, 20/120 = £16.67 goes in VAT, 13.8/113.8 x £83.33 = £10.10 goes in Employer's NIC, leaving £73.23 gross wage, from which 32 per cent basic rate tax plus NIC is deducted = £49.80 net wages, a marginal tax rate of 50.2 per cent; not the 40.2 per cent he mentions.
