UK tax update
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The writer, a former secretary to the Treasury, is a visiting professor at King’s College London.
Controlling public finances is a Sisyphean job. But this weekend the UK Treasury will celebrate a tax increase on a scale never seen in this century.
For me, this reaffirms two historic axioms. First, no matter how politicians resist the inevitable, structural increases in public spending must eventually be paid for in taxes. Second, if the chip goes down, the government will always rely on increasing national insurance contributions.
The first 75 years of the 20th century saw a relentless increase in the size of the British nation. It changed in the mid 1970’s. Inflation has attracted more and more workers to income tax. The cuts imposed by the IMF have created disillusionment with what taxpayers are getting in return. Politicians are starting to approach taxes from a more managerial point of view.
For some time, it has become fashionable to raise the VAT. But it waned in the sense that successive Conservative prime ministers were unable to persuade Congress to expand the VAT base. And anyway, finance ministers and officials are starting to realize that national insurance contributions are less popular than income or VAT.
The clue was in the name. Voters have associated national insurance with good things like the NHS and state pensions. While this was not strictly true (the National Insurance Fund is more evident than it really is), the Treasury was too happy to take advantage of this characteristic of taxpayer psychology.
Since 1977, the main ratio of national insurance paid by workers has been reduced from 5.75% to 13.25%, from April next year to 13.25%, and the basic rate of income tax has been reduced from 34% to 20%.
However, the problem with national insurance is that it is paid only for earned income. No dividends or rents were paid on return on investment. It is paid only to persons under the age of receiving the national pension. And unlike the progressive structure of income tax, the rate of tax paid decreases as income increases.
In honor of Prime Minister Rishi Sunak, he sought to address some of these deficiencies through proposals for health and social welfare contributions. Contributions are levied on dividends and pensioners’ income. However, rent is waived. Admittedly, the taxes paid by the pensioners who make up for her meager income working in the supermarket, but not the landlords living on the tenant’s rent, are not fair.
However, there is another reason why successive governments have favored national insurance over income tax increases. Employers also pay national insurance, and the government quickly reflects increases in employee rates in the rates typically paid by employers. The latter also rises by 1.25 percentage points from April next year to reach 15.05%.
Taxing employers is politically easier. There are not many votes. However, an employer’s national insurance is a tax on employment. Tax more employment and receive less.
Sunak has announced more than £40 billion in tax increases this year, of which nearly two-thirds will be borne by businesses in the form of corporate taxes and national insurance. It could be good politics, but it’s almost certainly a bad economy at a time when Brexit has made it more important than ever that the UK is business-friendly.
And that leads me to the final axiom. There have been many “radical reform” budgets in the last 50 years. Tax rates go up and down, new taxes are created, old taxes are abolished. However, during this period, tax collection was stubbornly stable. No prime minister has ever received a tax receipt exceeding 34.1% of national income. Sunak’s announcement assumes no tax collection has been seen since the post-war era of austerity. Forgive me for thinking this could still prove a mirage.
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