Combining National Insurance and Income Tax is an excellent idea
Which is why we’ve recommended it more than once around here before. Of course, there will be problems with such a combination. The payment of national insurance - at those different rates dependent upon employment status - gives rise to different access to welfare benefits for example. We think all of those can be managed, or at least are worth it given one important effect:
The idea of combining national insurance, which dates back more than a century, with income tax has circulated for decades, prompting a succession of chancellors to toy with the prospect of a vast shake-up. Nigel Lawson considered a combination in the 1980s, and George Osborne launched a review in 2015. Four years ago the Office of Tax Simplification recommended closer alignment. The Treasury raises about £193 billion from income tax and £137 billion via national insurance contributions each year.
The grander point being if we combine employers’ and employees’ NI into income tax. This would not change the actual tax rate as all of those are incident upon wages - employers don’t carry any of that burden. It would though make clear what that burden on wages is - 40% and more from just over the personal allowance up to the mid 50s percent for top earners.
That is, Britain is not a low tax society. Further, it might well be one which should have a more progressive taxation system. We can’t - as we’re already at the Laffer Curve peak - increase top end taxation upon income as Diamond and Saez have shown. In a system with allowances, something that cannot be changed given that the ability to emigrate is just such an allowance, 54% or so is about tops. So, greater progressivity can only be achieved by lowering the tax burden on the lower paid.
We’re just fine with progressivity, as Smith himself was - that greater than in proportion part. That given our current tax system the only way to provide it is less taxation is to us just a bonus. And making this clear would be a significant benefit of that merger of national insurance and the income tax system.
So, yes, let’s do it.