28 September 2017
Hypothetically
A suggestion to Mr Hammond.
By J.R. Thomas
We live in a world which our not so distant ancestors would have found very surprising. Not the invention of the motor car, or the mobile telephone, or women being allowed to work in offices alongside men, or even free education for all. No, what would have amazed them is the way we all accept that we pay taxation so regularly and willingly and in such large amounts.
In the 1640’s Englishman fought Englishman for six years in a vicious and ruinous war that had many causes, but the immediate trigger of which was the King’s insistence on raising money for his navy by the imposition of a tax popularly, or unpopularly, known as Ship Money. Like many taxes, Ship Money began as a narrow tax payable only in seaports for fighting ships but the clever men of Whitehall (Palace, at that time) soon loosened things up so that it covered many areas of military expenditure and was widely levied, all without the consent of Parliament. As we know, that attempt to raise tax did not end well for the executive, but it did create the circumstances which led to both our modern democracy and to our modern political parties.
It also made direct taxation generally an unpopular subject among the citizens of these United Kingdoms, and a great deal of thought went into how otherwise to raise the money which governments needed. General income tax was frowned upon, although seen as a necessity in time of war when the well-heeled accepted that if the poor must do the fighting, the rich would pay for it. As every school child used to know, the first real instrument of general taxation was the window tax, a sort of poll tax which fell principally on the rich (and led to the first avoidance scheme – bricking up windows). It was the main source of tax revenue throughout most of the eighteenth century; until Mr Pitt in 1798 introduced the income tax levied at 10% top rate and 2d in the pound on more middle class incomes. In its way that was a hypothecated tax; it was specifically to pay for the costs of the war against France and Napoleon, and such was the uproar and hullabaloo that Pitt promised it would be temporary. It was abolished for a year in 1803; and again from 1816 to 1842, but was brought back by that otherwise conservative Conservative Robert Peel who again promised it would be temporary. Perhaps one day it may turn out to be so. But the truth is that it is too useful in its ability to meet governmental costs without alerting the public too much as to what they are actually paying for ever to be done away with.
In more recent times hypothecation of taxation has been avoided if at all possible; mainly to try to avoid the arguments of those who would, for instance, not wish to contribute to military expenditure or to the police or education (“but we have no children”). After the First World War the rapid growth in ownership of motor vehicles led to the introduction of the road fund license, the income from which was dedicated to improving roads and building new ones. We still have that, now made more sophisticated by linking it to the size of car engines (and thus, roughly, to the price of cars). We also have fuel tax, a remarkable tax in that the tax, like that on cigarettes, is several times the base price of the product. If all that were dedicated to road maintenance and building we would have the finest road system, and the best maintained, in the world. As it is. somehow we have ended up with about the worst public roads in Europe, and most motoring taxes go to other causes – such as subsidising our public transport systems, though mysteriously, they too suffer from underinvestment and skimped maintenance, and yet are among the most expensive in the world.
There are in fact still some quasi hypothecated taxes in the road system – more commonly in Europe where many countries have toll roads. But even in Britain we have toll bridges, a few ancient and long since having been paid for, some modern (and in the case of the Humber Bridge, from nowhere to nowhere by way of some marginal Parliamentary seats, never to be paid for). And there is one great dedicated tax which we all seem to accept quite happily, the National Insurance Fund, which is a flat rate tax, almost impossible for an individual to avoid, set at a rate of around 11% on employees depending on exact circumstances, with further hefty contributions by employers, and different rates for the self-employed. This pays state pensions and some other lesser benefits. It is immensely profitable; perhaps not quite the right expression; but it certainly makes a sizable annual surplus which is then on-lent to the Treasury, mainly to help meet the costs of UK health services.
Which brings us to this week’s helpful suggestion to Mr Hammond, busy chewing his biro in the Treasury as he adds and subtracts for the forthcoming November budget. Here, Philip, is the opportunity to be remembered as a great reforming Chancellor, not quite a second Gladstone perhaps, but certainly as bold and intelligent, the solver of a major conundrum. It is simple: why not create a National Health Fund, into which those who make National Insurance contributions pay a flat rate to fund the nation’s health care. But, you will immediately protest – I can hear you protesting from here – that imposes a further burden on the low earners and benefits the rich. But there is no need why that should be so; the income tax rates can readily be adjusted so that the heavily burdened and indeed the struggling middle will pay significantly less income tax, and furthermore the rate of National Insurance could be significantly cut as there would be no need for cross subsidisation by those strange “loans”, which have even less chance of being repaid than the average student loan.
Best of all though, we could all at last see what the NHS is costing us. We might think we are in receipt of the best bargain of all time; or we might think it seems damnably expensive and start to take a much greater interest in how it is run and how it might operate better and how it might do things differently, or not at all. The socialists amongst you will say that this is an insurance scheme and so it is. But no more than the present set-up, which is simply an insurance scheme where the premium payers have no idea what premiums they pay. The free-marketeers might say that the next stage is to have competing schemes, where citizens can contribute to different funds with differing levels of benefits and comfort and cover. As long as there is a compulsory minimum, why not? It seems to work well enough for car insurance. But that would be for a future Government to consider.
It also works well enough for National Insurance, and you might argue, would work better still if there were competing pension schemes with better returns than the government has awarded in recent years.
For Mr Hammond, who may still have ambition and certainly must want to be kindly remembered, an outcome granted to few Chancellors, he can achieve greatness in reducing the income tax and National Insurance, and putting the NHS on a firmer and less politicised footing. He need do nothing to tinker with entitlement or universality and no cuts in funding would take place (though they might take on a measure of support if the cost of the health service was winkled out in this way). He would wrong-foot that woman next door, and that blond chap down the road, and become the people’s Phil. And make the Tory Party look as though it has thoughtful and original ideas of its own, not borrowed from the bearded chap on the opposite bench.
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