Merging NI and income tax

[longfingernails]

There are rumours that George Osborne will merge NI and income tax in the Budget.

What a superb idea!

Simplify the system, and make Britain's true ~65% income tax apparent to all - then cut the true income tax rate by scrapping more quangos, cutting red tape, and clamping down harder on benefit scroungers.

No more will future Labour governments be able to hike the income-tax-in-all-but-name.

It's certainly not smooth at the bottom. Even the universal benefit will see huge sums taken for every extra penny worked but the only way to deal very easily with that is give everyone whetehr they work or not a universal benefit - say £200 a week and then there is little incentive not to work as what you have is the same whether you work or not.

We could certainly do with some tax simplicity.

We are increasing the single person allowance next year to about £8k and the minimum wage is £13k a year and the average wage £20k. More people will pay 40% tax as the limit for that will come down but you add your £8k allowance on to work out if you're in the band. But let's say a lot more people will be paying 40% tax and NI and basic rate tax payers on 20% plus 11% nit are paying 31%. So we could surely presumably relatively easily simply devise a 40% tax and NI flat tax perhaps with the universal benefit as well to soften the blow.

Paul88 - your numbers are for total tax rates by income?

But people pay different tax rates as their salary increases. When thinking about taking on extra work or 'down shifting' to a lower paid job people tend to make decisions based on their marginal rate of tax rather than total proportion of tax.

The phased loss of personal tax allowance at £100k causes some very high marginal tax rates (60%?). It will be useful to see research on how this impacts work choices.

I think we need to be clear what the primary purpose of tax is - raising income or fairness and redistribution? If the later -the result might be larger public service cuts.

NI is only payable on earned income, and by employers.

If NI is broadened to all income, then it would be a big hit on pensioners, savers, and pension funds (thus reducing future pensioners' annuity rates). An age-related personal allowance would not be an adequate recompense, as it would not cover those who retired early (eg on medical grounds), and wouldn't necessarily have the right effect anyhow as retirement age becomes more flexible.

Very true which is why it may not happen as it will be complext to get right whilst aiming to be simple. ALso many man people work after the age of 65 and stop paying NI then, I think. They've contributed in to their pot over the years, served their time, paid what they will feel is their contribution to their state pension. So we would have to graduate it in well. Perhaps we could make so many cut backs that we can simply abolish employer and employee NI entirely and just put up all tax a little bit to compensate.

Flat tax of 40% on everything then including capital gains? Or 30%? Someone neesd to do the sums and if we removed 10% CGT and replaced with the old 40% we used to have would people be less enterprising and poor suffer as less tax is recovered?

I certainly think someone having to think will i do work all day at the weekend for extra pay whic might help towards our holiday and give 52% to the Govenrment or more if you're in one of the tax traps we have now we have more complex 3 rates not just two, might say can't be bothered to give more than what I earn to be misspent on defence and the idle poor. I'll not work particularly if working means less time with children. If it were more like 20% they might.

No one has ever achieved the holy grail of tax simplicity. The 10% Bulgaian flat tax looks attractive but probably none of us want to live there, we'd rather pick Zug. The reduction of the top rate to 4-0% frmop the 65% and 99% rates of old was a massive success and we've lost that through the new 50% rate and recent complications.

"Chil - you know better than that, there is no middle income trap. "

Maybe not in pure income tax terms but the HRT threshold is rapidly becoming the cut-off for other income-related items. You mentioned the CB change which is significant. Then there are things like student fees - subsidised for those on lower incomes. And student loans which have to be paid back by those with an income over a certain amount. Find yourself the wrong side of the reduced HRT threshold and the true financial impact can come as a nasty shock.

The argument that 'they can afford it' starts to wear a bit thin.

Well, I approve of this move because I've always hated the name National Insurance. It's SUCH a lie; it doesn't insure ANYTHING.

However, I find some of the ideas people expound here strange. How can people still trust this government to cut 'red tape' and 'bureaucracy' instead of frontline services? What they have actually done is increased red tape and allowed administrators to decide where there will be cuts - which will, therefore not include cuts to the number of administrators or their salaries...

So this move is not a reform of the tax system as a whole. It's probably part of their effort to stick it to the middle, who were the main beneficiaries of the welfare state.

They certanily aren't radical enough - all we had to choose from was Labour cutting 20% and the coaltion 25%.

They never seem to manage to simplify the tax system except when we went down to low rate and 40% rate that did work and it was simpler and people had less incentive to engage in lawful avoidance than when rates were up to 99%. Now stamp duty is up to 5% you will get the same effect - more money for accountants.

I still support a tax NI merger (adn the universal benefit) in principle as they are at least an attempt at simplification.

Chil, I so agree. I'm starting to wonder why I went out to work after the dcs were born. If I'd been an SAHM, DH's income would be similar, we would qualify for a schoolfees bursary and family tax credit. There is SO a middle-income trap.

I personally am currently choosing not to increase my hours - a significant consideration in that choice was the effective 73% deduction rate I would suffer on any additional income from April 11.
There are other considerations, which mainly relate to being there when my children are not in school.
I don't need that extra 27%, so I'm not increasing my hours. There would be a point at which that decision would reverse, I'm not sure where it is for me, probably around 50%.
And if each extra £ in my pocket would make a real difference to my life I would be working extra despite the 73% rate.

Yes, it's those types of distortions which make everything very hard and how to wipe them out. The same thing applies to those who don't work at all and start to. It's not easy but a basic simplifcation of merging tax and NI or even radically abolishing employee and employer NI which would be simpler and not result in tax rates for those over 65 in work who don't pay NI and those living on investment income who just pay income tax not NI would be purer.

jackstarb you are correct; marginal rates at 100k are high although not for long. If you plot the figures I gave you get a bump in the graph. This is a consequence of tweaking a system and being too scared of changing headline figures - easier to say reduce personal allowance than increase tax rates. Both parties are guilty of this.

It is still a lower marginal rate than people face coming off benefits / tax credits though.

From a clean slate it would be easy to ensure this sort of anomaly wasn't there.

as for the purpose of tax - of course it is for raising income (what else?) and of course it should be done in a fair way. I am very glad to live in a society that pays benefits to those who need them - lots of people on this thread agree that a universal credit is a good idea. So "redistribution" is one of the things that the income is spent on.