Taxing questions

The post-war Labour minister Aneurin Bevan said that the great secret about the National Insurance Fund is that there is no fund. This is not strictly true: there is a fund but it does not provide insurance. NI contributions are paid into it but the money is used for current spending and not set aside for future requirements. Many people still believe the NICs they pay are being invested in personalised accounts for their retirement, when the contributory principle was broken a long time ago. Once a flat-rate universal pension is introduced in 2017 only 5 per cent of benefits will be linked to contributions.

So has the time come to acknowledge this reality and merge the tax and National Insurance systems? George Osborne, the Chancellor of the Exchequer, is contemplating the creation of a single “earnings tax”, ushering in what would be the biggest fiscal reform since the war. He is not the first occupant of the Treasury to consider combining the two systems. He thought about it himself three years ago but shied away amid concerns over whether the IT would work. But even if the technological difficulties could be overcome, would such a merger be advisable?

The advantages are greater transparency, fewer administrative burdens on business and fairer taxes. The drawbacks include the potential impact on pensioners who currently do not pay NICs, and on the self-employed. If this reform contributes to a simpler tax system then all well and good. If it is to be a backdoor way of raising more revenue, then we can do without it. In the long run, taxpayers need incentives to build up their own retirement and sickness cover because the state has shown it cannot be trusted with their savings.