By Dr Patrick Nolan, Chief Economist, Reform
Earlier today Jonathan Isaby posted on the cost of cancelling the rise in national insurance contributions (NICs). This follows news that the Conservative party may pledge to halt on the 1 per cent rise in NICs. Halting the rise in these taxes is a policy that Reform has previously supported; indeed we have proposed going further and cutting these taxes through eliminating the exemptions in the VAT base. As we noted in Reality check the NICs increase will be a job killer and this approach of raising taxes on jobs is astonishing given a rise in unemployment of 22 per cent in the last year.
Reform has estimated the cost of cancelling the NIC rise and these follow (the estimates below are static only, so do not account for behavioural changes, and are thus likely to overstate the costs of halting this increase). These estimates are based on the Reform tax calculator which, unlike the Treasury’s ready reckoner, allows the revenue effect of changes to both rates and thresholds to be calculated. This is important as the government’s proposals are to both:
- Increase the employee primary rates (of 11% and 1%) and the employers’ primary rate (of 12.8%) by 1%; and
- Increase the primary threshold (currently £110 per week) to around £135. PBR 2008 proposed increasing this threshold to around £125 per week (equivalent to the level of the personal allowance) and this was taken further in PBR 2009 to help offset the increase in national insurance contribution rates for lower income workers.
Taken together these proposals are estimated to increase tax revenue by around £6.7 billion, not the £10 billion noted by some.
Thus, any proposals to halt the increase in national insurance contribution rates also need to consider whether to change the primary threshold (the income at which these contributions start being paid). Keeping the primary threshold at the current level of £110 would mean that halting the increase in the contribution rates would be more affordable, but would also mean that some lower income workers would face a higher overall national insurance bill than under current government plans.
This discussion highlights that governments have choices when it comes to setting different tax rates and thresholds – and when evaluating these choices it is important to see how the system as a whole impacts on families and government finances. Using the Reform tax calculator you can develop your own plans for reforming the income tax and national insurance system – so, if you think that taxes on jobs should be lower, how would you approach this reform?
