Tuesday 18 February 2014

The most politically astute tax cut for Budget 2014: Employers NI

With an election coming up and a budget to plan for in a few weeks time, the Government is scratching around for candy to offer the masses in a desperate, if doomed, attempt to prevent a Labour Government coming to power next year.

Whilst the Liberal Democrats are all too keen on raising the tax free threshold to £12,500, there is precious little the Government can do in terms of the basic or higher rates of income tax. Changing these thresholds costs billions, as does raising the tax free threshold. Far more than any offset that will come through higher growth.

Plus tax cuts like these fail on some of the basics, they don't really encourage new jobs or investment. Whilst being a success for the very low paid - few of whom vote for either Tories or the Lib Dems if we are being honest - the benefits are very limited for those on average incomes. Worse, on higher incomes, all sorts of manoeuvres such as withdrawal of child tax benefit, removal of the free allowance at £100,000 anyway, conspire to push the tax ceiling to nearer 50% in any event.

The small return of cash to people is always welcome, however it is limited in its impact to help the 'cost of living crisis' as the vast sums returned are spread over so many millions that it ends up being a few pounds a week here or there. How this will turn into an election winning formula is unclear.

However, there is a saviour at hand in the form of removing another stealth tax. All employers pay this and it is a bewilderingly complicated formula to work out who should pay what. A classic example of the mess that our tax system has become with constant fiddling.

Nonetheless, companies pay around 12% on each employee they employ and this is a direct tax on employment. Not only that, it is a direct tax on salaries as companies staff costs are by default higher and they have a negative incentive to pay people more, as it has a double cost for them to give pay rise.

Cutting this rate by 2% would reduce companies costs of employment and potentially increase growth in the job market. Furthermore, with the right kind of 'nudge' messaging to the business community which is firmly behind the Government, it can also be used as a way to begin the process of increasing pay in a more sustainable way than has happened over the past couple of years. Companies would not be expected to pass on all of the saving, but sharing the benefit with employees would be a win-win compromise.

It's the only pro-growth cut that can please business and all employees at the same time.


Swiss Tax Exile said...

I can it now, "Tories give bosses NI tax cut"; "Tax cut allows Tesco to increase dividend" etc

NI is a strange tax, the idea of taxing work is odd. But nobody can merge it with NI, they say it's too complicated. So nothing changes.

dearieme said...

I think it'd be wiser to cut it by two percentage points.

Phil said...

Just cutting it has horrible political optics.

However, if it was announced as part and parcel with simplifying the tax structure for employment, bringing all the employment taxes together in a simpler system, then it might draw the sting from the obvious Labour counter attack that this was a tax cut for the bosses / owners / etc etc.

Bill Quango MP said...

It makes sense.
Though politically I'd be more inclined yo make it even messier at the expense of a good few days headlines.

N.I. Employers cut to under 20s to help youth unemployment.

Much harder for labour to claim its a shareholders bonus.
That argument is hard to sustain anyway. GO's first response would be " so you oppose reducing taxation on creating jobs? You would reverse this cut, is that correct?"

Not even someone as heedless of sensible headlines as ed balls would go there.

Sebastian Weetabix said...

@BQ: can you really imagine the BBC allowing that retort air time? They'll be filming from underneath and using Dracula make-up while intoning balefully about poor workers on the minimum wage subsidising millionaire boss tax cuts. And it will work because Joe Bloggs doesn't view NI as a tax on jobs - he thinks it pays for the NHS. You know, the one the fat cat bosses and shareholders avoid by going private. Ed Balls would be at it like a greased weasel.

CityUnslicker said...

HMmm..some reasonable points; but from a PR perspective they can be overcome I feel.

All tax cuts can be met with the skoolsnospitals mantra - but we also know people vote to keep their own money.

This is one of the better ways to message a tax cut - much better than 45p to 40p!

dearieme said...

In summary, because it would be an entirely rational policy, the stupidity and ignorance of the electorate precludes it.

andrew said...

ni is too invisible, once the 'universal benefit' is in place, promise to introduce an automatic basic tax threshold escalator, so that in 10 years time someone on the average wage pays no income tax (and gets no benefits)

Sebastian Weetabix said...

@CU: employers NI is someone else's money. It doesn't come directly from the workers pay packet (I know, I know... but that's how it looks to vast majority).

"Tax cuts for millionaires.." Skoolsnhospitals wouldn't even begin to encompass the lefty rage.

There are better battles to fight. We could start with, ooh, I don't know... A bonfire of the quangos? Income tax cuts? Eliminating the charitable status of Common Purpose? Return to charity law circa 2000 and prevent the buggers being a system of outdoor relief for indigent left-wing scumbags?

Mark Wadsworth said...

No, the most damaging and distorting tax per £ of revenue raised is VAT.

It's just that the pol's have even managed to convince themselves that "The consumer pays the tax so VAT doesn't hurt businesses or the economy".

Which is good, because a VAT cut primarily benefits businesses and those in work (who who can now move into work) but the pol's can say they are doing it for EVERYBODY'S benefit.

Mark Wadsworth said...

Employer's NI is probably the second worst tax though, we can do that next.

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