Analysis: Coalition's tax shift is an ugly merger

New tax policy is nowhere near as straightforward as it looks
New tax policy is nowhere near as straightforward as it looks

By merging their tax policies, the Liberal Democrats and the Conservatives have come up with a fiscal package which needs to be treated with extreme caution.

By Alex Stevenson

This is the result of a change rooted in party politics and the pursuit of power.

Plans for the national insurance contributions bill were first published in yesterday's Queen's Speech. They are high-profile measures aimed at stopping Labour's 'jobs tax', as the Conservatives put it during the general election campaign.

In fact - as is so often the case with tax - it's nowhere near as simple as it sounds. The coalition has fudged the issue majestically.

The general election campaign was dominated, before the TV debates began at least, by the 'jobs tax' spectre. This was the Tories' criticism of Labour's plans to raise national insurance contributions for both employers and employees by 0.5% from 2011 onwards.

The Conservative manifesto said the party would raise the thresholds at which both employees and employers start paying national insurance to offset the damage - and use £6 billion of savings in 2010/11 to pay for it.

If David Cameron had won an outright majority this is the policy we could have expected. In the event, Liberal Democrat tax priorities have taken over.

What we have seen instead is the Lib Dems' increase in income tax allowance, designed to help lower and middle-income earners, gain precedence.

It's not something for nothing, of course. The coalition government has dropped plans to raise the threshold for employees. The Treasury says under the full changes most people will be relatively better off compared to the previous government's plan. Employees earning under £20,000 will pay less national insurance contributions.

What about employers? Again, the threshold will be set so that salaries of over around £20,000 will end up requiring payments greater than the current level. Contributions for salaries below £20,000 will pay less. We can't calculate exactly who will be adversely affected just yet - overall businesses will be paying more. But the threshold increase for employers is going ahead, keeping the CBI happy.

According to the Treasury, therefore, employees should be happy because the income tax allowance is helping them. Employers are getting help from their raised threshold. But the truth is it isn't anywhere near so simple. Economists don't view much of a distinction between employee and employer national insurance. David Phillips, senior research economist at the Institute of Fiscal Studies, says they are "effectively the same tax".

"If one is labelled 'employers' and one 'employees', that doesn't mean they affect different people," he says.

"We think ultimately, once wages are adjusted and things work out, both of them will have the same effect. Broadly that will be affecting employees rather than employers."

The bosses have more freedom to respond to the circumstances - and are likely to do so by cutting wages. This could have a negative impact on inflation: it could feed through to higher prices as easily as it could dampen the rate of inflation.

These are concerning developments from a tax shift which, let's face it, has taken place simply because of the need to placate the Lib Dems. There is another lesson to be learned, too: the emphasis on 'jobs tax' and the business-focused efforts on helping out 'employers', have a strikingly similar overall effect to the very different-sounding income tax allowance increase backed by Nick Clegg's party.

The merger of these two very distinctive policies has led to a fudge which, ultimately, changes little.

"It's not necessarily an overall tax increase compared to what the Tories were talking about doing during the election campaign," Mr Phillips says, summing up. "It's just giving some of the tax cut in income tax rather than NICs."

So when coalition politicians try to tell you they've saved Labour's jobs tax, be wary. They've given with one hand, but taken away with another.


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