THE GREAT LIE AT THE HEART OF OUR TAX SYSTEM
THe ferocious political controversy over National Insurance contributions of the self-employed has exposed the great lie at the heart of our tax system. these payments were first established more than a century ago as a means of providing social security through state healthcare and financial assistance for the poor where it was required.
But over the years, this noble principle has been shamefully eroded by political manipulation, misuse and mismanagement.
No longer a mark of civilised compassion, it is now a decaying, anachronistic monument to remorseless expansion by the State, and the chronic failure of a system that has trapped too many people in welfare dependency.
there is a widely held belief – which politicians cynically do little to contradict – that National Insurance contributions all go into a ring-fenced central pot of money, from which benefits and State pensions are paid.
Indeed, that was the theory behind the initial creation of National Insurance by the Liberal government in 1911. But the system has never actually worked out like that.
First, the State has become so dominant and is swallowing up so much of the nation’s income that its demands are far in excess of the sums provided by contributions. According to one forecast, this year Britain will spend £270 billion on public pensions and social security, more than twice the estimated £124 billion raised in National Insurance contributions.
Second, the essential principle of reciprocity which was once the foundation stone of the philosophy of National Insurance has been completely destroyed by the massive extension of indiscriminate welfare benefit payments since World War II.
Famously, the great social reformer Lord Beveridge refashioned the social security system around National Insurance as a ‘something for something’ society. On this basis, people contributed to – as well as receiving from – the State.
Yet today, support from the State is, in effect, based largely based on perceived need, regardless of personal behaviour or work record. that explains why lavish welfare was, until recent reforms, a vast engine of fecklessness, family breakdown and job avoidance.
third, politicians have been unable to resist using the National Insurance Fund to prop up other spending schemes.
the idea that the Fund is ringfenced has long been a fiction.
Its large revenue, only exceeded by VAT and income tax, is too tempting for politicians of all parties not to plunder.
In the process, National Insurance contributions have become just another form of taxation, without the public fully recognising the truth.
In fact, because of its traditional associations with personal responsibility and social concern, National Insurance has a far more positive image than Income tax, which at its worst tends to be regarded as a form of extortion.
As a result, Chancellors are far more willing to push up National Insurance Contribution (NIC) rates than income tax, where any increase would be far more incendiary.
For example, in 2002 Chancellor Gordon Brown put up National Insurance by 1p in the pound, specifically to provide more funds for the NHS.
But like income tax, National Insurance amounts to a levy on earnings and a burden on job creation.
It was the Nobel prize-winning Scottish economist Sir James Mirrlees who recently said: ‘National Insurance is not a true social insurance scheme. It is just another tax on earnings, and the current scheme invited politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income.’
there are other problems with National Insurance.
One is that it is to an extent regressive. the threshold for starting to pay NI contributions at the standard 12pc for those in employment is currently £155 a week (or earnings of £8,060 per year). But above earnings of £43,000, National Insurance is paid at just 2pc, which means that the lower-paid hand over proportionately more of their income in contributions than the better off do.
then there is the confusing number of classes of contributors – comprising separate ones for employees, employers, two different categories for the self-employed (admittedly, shortly to be streamlined) and a band for voluntary contributions.
Nor is the system rigorously administered, which is a major failing in our age of mass immigration, when the system is open to abuse.
Indeed, National Insurance numbers - which allow people to access a plethora of welfare benefits - seem to be handed out freely like confetti. Last year alone, there were 825,000 National Insurance registrations by foreigners.
the real problem with National Insurance today is that the level of welfare benefits that has evolved since World War II means the link has been severed between benefits and contributions, thereby making a mockery of the original concept of social insurance.
Second, the National Insurance Fund itself has long been under constant pressure from politicians who raided it for public spending and it was unable to cope with such demands. But to the politicians, that did not really matter.
the public could simply be asked to pay more, as ministers increasingly exploited and abused the fund at will.
the obvious solution would be to stop indulging in sentimental fantasy, and treat National Insurance as a proper form of income tax.
But politicians are unlikely to take such a radical step since it would reveal the truth about the real burden of money-grabbing by the State. In a system that unified income tax and National Insurance, the basic rate of income tax would be 32 per cent, not the current supposed 20 per cent. the cat would then be out of the bag about the true extent that we are all taxed.
Furthermore, politicians would lose the cash reserve that has often served as a prop to their profligacy.
So the messy, outdated system will remain, and Chancellors such as Philip Hammond will continue to find themselves in trouble when they fiddle with it.