Emily Carver is a writer and broadcaster
While much was foreseen and leaked to the press in the days before, the Chancellor did use yesterday’s budget statement to set out an unexpected course. If he pursues it, he has the potential to be a far more radical resident of Number 11 Downing Street than anyone expected.
It wasn’t just the immediate 2 per cent cut to national insurance which, while welcome, had been trailed for days. What he said that stuck out was more to do with the future direction of travel for our tax system. Although it was a rather dreary statement, with surprises few and far between, Jeremy Hunt did deliver a line that had fans of the free market cheering.
The Chancellor acknowledged that paying both national insurance and income tax is “double taxation” and “unfair”. He said it “penalises work instead of encouraging it”. And more importantly, he said the Conservatives’ “long-term ambition” is to end the unfairness of double taxation on work.
So, there we go. Hunt is not content with the 2 per cent cut we saw in the Autumn Statement, nor is he content to shave another 2 per cent off this time around. He aspires to gradually abolish national insurance altogether, a tax that has existed in one way or another for well over a century.
This would be a sensible move. For the Chancellor to use each future fiscal event to cut national insurance more and more until we end the farce of double taxation on income would be radical.
This nonsensical system of taxation not only eats into people’s incomes but acts as tax on employment, aspiration, and growth, while acting as a brake on productivity and progress – all the things that have been keeping this country poorer than it should be.
Of course, for decades, free-market think tanks and conservative organisations have expressed bewilderment at this system.
But one of the problems is the level of misunderstanding about what national insurance is, with myths frequently perpetuated by politicians and the media. People think that it is some sort of insurance system: workers pay in and get their money out.
But this is a fiction: there is no pot, and there is no hypothecation of this tax. In reality, all of the money goes into the same big pot and is taken out and used for current expenditure. It’s not saved for the future. It’s not insuring you for your pension. It doesn’t get funneled directly into the NHS.
National insurance is perhaps the biggest lie in British politics (or at least in tax policy). Unpicking this tax will unpick that lie.
The confusion sometimes masks just how much we’re all taxed. A tax rate of 40 per cent, for example, is not really a tax rate of 40 per cent at all because you then have to add 10 per cent national insurance on top (or 8 per cent from April).
However, if Hunt’s plan is followed, you’ll have to add less and less until your real tax rate is that which is shown on your headline tax rate. That should be an important, progressive, and simplifying measure.
Fundamentally, that is what our tax system needs. Not just lower taxes, but simpler taxes. Complicated tax systems are costly, wrought with difficulty, and they undermine the openness of our market economy.
The announcement in the Chancellor’s statement could start to unpick that complication by beginning a much-needed process of simplification, moving us to a better more rational place. Surely, it can’t be an advantage for the British economy that the UK tax code is roughly 21,000 pages long? Start to simply that system and it surely moves us to a better, more rational place.
Of course, the reality of where the Conservatives are polling right now makes it highly unlikely that Hunt will be the man to see this ambition through. But by taking the axe to national insurance, he might help convince more of MPs that ditching that tax on jobs would boost growth in the future.