Yesterday Rishi Sunak launched the Conservative Party Manifesto. As I wrote yesterday, it was a missed opportunity to be bold on supply side reforms when it comes to getting the country building and thereby boosting productivity and economic growth.
It was also a missed opportunity (or, one could say, an opportunity lost…) in terms of tax reform. As I have written about recently, the UK is in dire need of tax reform and simplification and this should be the priority over expensive tax cuts and levies on specific groups or activities.
Unfortunately, the Tories – like all politicians – cannot resist the temptation to meddle in the economy by tinkering with the tax system. The most striking example of this in the Manifesto is the announcement the abolition of the main rate of National Insurance Contributions for self-employment.
National Insurance is an economically damaging tax. The incidence of both employee and employer NICs does tend to fall on workers in the form of lower wages and fewer job opportunities; payroll taxes such as NICs are essentially a tax on labour.
What is more, National Insurance also fuels the entitlement culture among older people. As I have written before, this means that it is very difficult to make the necessary reforms to the State Pension as people view it as an entitlement as they think that ‘they have paid in all their lives’.
National Insurance is also complex. The different rates mean that it increases the administrative burden – and therefore cost – to businesses, individuals, and the State.
However, the changes proposed by the Tories would be a mistake. It risks increasing the administrative burden further by making the tax system even more complicated, meaning it is more difficult and costly for firms and officials to navigate. It also risks distorting economic activity as it will exert an undue influence on how people work. In his speech yesterday, Sunak rightly pointed out that individuals spend their money more wisely than the State. The reason for this is because individuals understand their own needs and preferences better than any politician or civil servant ever could. As such, they should be free to make their own choices about work without that being influenced by the taxman. Finally, such a move would be unfair. It is just not fair that people who have similar income levels should be taxed more heavily because of how they choose to work.
National Insurance is in dire need of reform. However, the correct approach to this would be to scrap all the different rates of NICs and then merge it with Income Tax in order to create a single tax on income.
Sunak also stated that one of the reasons for scrapping the main rate of NICs for self-employment was to encourage people to start their own business. This is an admirable aim. We do need people to take more of a risk and become entrepreneurs. Our economy would be stronger and more dynamic and we would all be better off if we became a more entrepreneurial nation. As Sir Keith Joseph memorably put it, ‘we need more millionaires and more bankrupts’.
Unfortunately, there is scant evidence that the proposed reforms would encourage entrepreneurship as they are poorly targeted. Such a system would apply to someone taking a chance by launching a completely new product or service but they would equally apply to someone who becomes a plumber. We certainly do need more plumbers, but it is not an industry in the cutting edge and so is not likely to boost the innovation that the economy needs.
Perhaps more importantly, it does not address one of the biggest barriers to becoming an entrepreneur or creating something new: the risk of failure. A lower tax bill might provide a small incentive towards entrepreneurship, but not one large enough for most people to step out and risk their livelihoods by working for less money and with the very real prospect of failure.
We need to update Joseph’s mantra for the 21st Century. We have plenty of millionaires and so now we need more billionaires. What is more, while we shouldn’t seek to remove all the risks to individuals who are starting their own business, it would certainly be nice if we could remove the risk of financial hardship and bankruptcy.
Tinkering with NICs is an inefficient way to create an economy with more billionaires and fewer bankrupts. A better approach would be to reform the benefits system so that it provides a true safety net, not just for those who lose their jobs but also for those brave enough to start their own business.
As I have argued before, the most efficient way to do this would be to merge all benefits including the State Pension into a Universal Basic Income (UBI). The UBI would be universal so would apply to everyone in the country but would be subject to taxation and would also have the potential to bring in savings by reducing the size of the State so it would not be too expensive. Furthermore, while it would be enough to cover the essentials, it would not act as a disincentive to work. What it would do is provide real support for people to make the leap from being employed to self-employed.
If the government is serious about boosting economic growth by encouraging entrepreneurship then it needs to stop tinkering with the tax system. Instead it should provide proper incentives by reforming the benefits system and introducing a UBI.
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