An opportunity for the Office of Tax Simplification?

The announcement of the proposed £140 a week State Pension and the change in the requirements to get it - specifically the change from years of National Insurance contributions to years of residency - got me thinking to what the raison d'etre of the NI system would be after such a change.



National Insurance was originally introduced to pay for the NHS, the State Pension and poverty benefits, however the amount the government receives from the NI system (£96bn*) is now around a third of the cost of these (£261bn*) - the rest having to be met by other forms of taxation.

The State Pension accounts for 80% of the spending by the national insurance fund, with all other benefits (Incapacity Benefit, SSP, SMP etc) making up the rest. With the link between NI contributions and entitlement to the State Pension broken surely it would make more sense to abolish the NI system for employees altogether and increase Income Tax to compensate.

This would have several beneficial effects upon the complexity of the tax system - the strong tax incentives towards being self-employed (you get to keep 71% of the cost of employing you compared with 60% for employees) or having a one-man-band limited company would mostly disappear, both simplifying the tax system and making tax avoidance less attractive.

Of course the question of what to do with employer's NI contributions would be more tricky, technically you could eliminate them and recoup the costs through a higher rate of corporation tax but this would probably mean a doubling of the corporation tax rate, something politically impossible - however I believe some combination of higher corporation tax, (still) higher VAT and lower employer's NI contributions could be possible.
With employer's NI cut then the costs to employ workers would also fall significantly, presumably leading to a similar rise in either wages, employment or more likely both.

A simpler tax system, less tax avoidance, higher wages, more jobs, higher prices (through the VAT rise) to help cut the real value of our over-indebtedness and the possibility of boosting the returns on labour compared to capital.

Sounds like a winner to me :)

* Source: HM Treasury - June Budget