Tax hike bungle

Apart from a rise in the rate of VAT, it would be difficult to think of a worse way of raising additional revenue than by increasing the rate of National Insurance. ALL of the increase will end up being paid by employers. The increase in the “employees’ contribution” will spark of a round of pay claims, which, given the present tight supply of labour, employers will mostly be forced to give into, especially in the public sector. Given the proportion of the economy which is in the public sector, probably around 40%, the increase in NI will end up as an enforced increase in public spending with nothing to show for it since the increased revenue will be purely illusory, due to churning. Futher in the future, the increase, by pushing up labour costs, will encourage employers to get rid of staff by replacing them with IT or withdrawing the services.

The curious thing is that, without breaking manifesto committments, the government could have raised additional revenue, fairely and without harming the economy, by introducing a national component to the Council Tax.

There is a detailed discussion of this, with comments, on Mark Wadsworth’s blog site. Elsewhere, unfortunately, there is little to be found in the way of coherent analysis, which is one reason why successive governments get away with these rotten policies.