UK Poverty Post

Let’s make tax more fair

Voters want clarity on how they will be taxed, but they also need their leaders to get it right.

Referring to the scheduled 0.5% increase in the rate of National Insurance (on top of an identical increase last year) during a measured performance on Radio Five Live yesterday afternoon, David Cameron said that his party is “looking as hard as we can at public spending programmes and trying to see if we can avoid at least a part of this great big tax rise on Middle Britain and on jobs,” adding in a separate interview later that he hoped to find a “way of avoiding the most damaging parts of the national insurance increase”.

The comments have caused some confusion, notably in the Financial Times and the Guardian this morning, over the extent to which the Conservatives will seek to avoid the measure. Last month Conservative shadow chancellor George Osborn said his “number one priority is to try to avoid bringing [the national insurance increase] in”.

The temptation to vacillate on such aims must be considerable. After all, according to the Financial Times the measure is expected to raise about £7bn a year. Yet it is a shame that episodes like these, where public awareness of tax policy is inadvertently increased, are normally used by most commentators to score partisan points. Moments like this are a chance to re-evaluate the ways in which we raise and spend public money in order to help achieve universally accepted aims like ending poverty in the UK.

National Insurance (or NI) is fundamentally a regressive tax. The Government has tended towards increasing NI rather than income tax. Perhaps this is because they believe that psychologically it is easier to ignore and therefore more difficult for opposition politicians to attack. Yet it is a tax that is capped to 1% above incomes of £43,875 in 2010-11, so even though the rise will not affect incomes under £20,000, it is odd that the main general tax rise contained in the Pre-Budget Report is not equitable. A relative increase in income tax on all incomes above £20,000 to start with would have realised greater revenues and would have been fairer – but perhaps a little more difficult to stomach politically.

In a time when every bit of revenue is precious because new revenue streams are going to be essential and spending heavily restricted, we have to be bold and implement any tax increases in the way that does the minimum damage to the fight against poverty in the UK – even if that means a tougher sell at the dispatch box. We’d like to see political parties promise to raise the threshold on this tax (and others) and reform NI to make it more redistributive. In the meantime, National Insurance hikes should be avoided where possible.

On NI Mr Cameron appears to be travelling in the right direction, we just don’t yet know how far he’ll go. If the Conservatives explained their policy in terms of fairness, they might find it easier to justify finding the money elsewhere.

The existing tax system takes a substantially larger proportion of the income of the poorest tenth than it does from the richest tenth. Here are just a few of our ideas for how to make the tax system fairer. Oxfam recommends that the UK Government:

• Shift indirect taxes to income taxes at higher earnings levels
• Where the tax system is reframed in favour of environmental taxation, regressive effects should be tempered by increasing the progressiveness of other aspects of the tax system – this will help prevent the economy from overheating when it returns to growth.
• Tax cuts should be aimed at low-paid people, who are more likely to release capital into circulation.
• Tax and benefit tapers – marginal tax rates – should be lowered to strengthen work as route out of poverty and prevent people from being trapped in low-paid work.
• Increase tax thresholds (including the National Insurance threshold).
• Reduce the taper at which housing and council tax benefits are withdrawn, making tax credits more flexible and responsive to changes in income so they are not abruptly withdrawn as income rises.
• Implement effective financial reform at the G20 and in Europe in order to ensure tax is collected without harming the competitiveness of the UK’s the financial services industry.

Oxfam’s briefing ‘Close to Home: UK poverty and the economic downturn’ is available HERE.
UPDATE: Cameron has confirmed that he is still looking for the money to pay to avoid the increase in National Insurance in 2011.