The typical employee's wage slip is something of a con.
Here's how it works. For earnings between £12,570 and £50,270 p.a. there are deductions of income tax at 20%, employee NIC at 12% but an additional 13.8% NIC is paid by the employer.
If someone on the average salary of c. £33,000 a year gets a raise of £1,000 the worker pays £320 in tax/NIC and the employer another £138. Thus in total it costs the salary department £1,138 to give the worker £680 net.
You would have the same result if you simply paid the worker £1,138 and charged income tax at 40.25%. From this point of view basic rate taxpayers are effectively Higher Rate taxpayers!
Back in 1910 a working class man might earn £50 - £100 per year depending on his level of skill. There was as yet no National Insurance Fund and the threshold for paying income tax was £160. So no tax and no NIC for the ordinary working person!
Once you were on a lot more - £700 a year - marginal income tax was a shilling in the pound i.e. 5%. In 1909 Lloyd George introduced a super-tax for the very wealthy on £5,000+ per annum: this was an extra 2.5%, bringing the total to 7.5% on margin.
It was a different world.
And in many ways a much worse world. Lives were shorter and illness more common - hundreds of thousands suffered from TB, for example. Certain industries were more likely to be hit by cyclical unemployment which would destroy the security of working class families, so that people who had joined friendly societies or taken out life insurance might have to default on their membership and policies. The edge of destitution was always close, with its threat of the workhouse or infirmary.
So let's bless the memory of the 'Welsh Wizard' who in 1911 presented Parliament with a plan for a National Insurance Fund to tackle these miseries. His introductory speech is on Hansard here. The scheme is complex and brilliantly worked-out. We must admire the intellectual quality of a Debating Chamber that could take in the details and ask penetrating questions; do we have such a one now?
The initial actuarial calculations had called for some fifteen years of extra Government funding to cover the cost of admitting older lives to the new plan, after which the State could step back and the scheme would be wholly reliant on the contributions from workers and employers.
The plan was doomed. The Bill became law in 1912 and benefits began to be paid the next year; but in 1914 a Privy Council meeting declared war on Germany.
The surplus funds designed to take care of future obligations were raided by Lloyd George to help pay the enormous costs of the conflict. Inflation doubled by 1918; then there was a slump and a few years later the Great Depression, bringing a level of unemployment for which the Fund had not been designed. Generally the nation's finances went haywire, so that in 1934 Britain defaulted on her huge wartime loans from the United States.
Then came World War Two, with more borrowings and the forfeiture of much of our gold and overseas business holdings. Yet the postwar Welfare State was established, broke though we were; how infinitely better would our position have been had we stayed out of both global conflicts?
These are the fruits of war.
Nevertheless, for a couple of decades the post-1945 National Insurance Fund rebuilt its surplus and the system moved to pay-as-you-go, funding benefits from current contributions, while maintaining significant reserves. However, expanding welfare programs and an ageing population saw the reserves dwindle to the status of a contingency fund; we are now on 'money in, money out.' Pensioners who say 'we paid in and now we are being short-changed' have to realise it is not like a Christmas club; they must accept what the State gives them and be thankful.
So let's dispense with the National Insurance taradiddle and charge a uniform tax of around 40%.
One advantage is that ordinary people would enjoy a much bigger tax break on voluntary pension contributions.
As for State pensioners, let all of them have the full basic State pension, and the Winter Fuel Allowance, and the bus pass and 25% 'widow's discount' on Council Tax and so on. Below a certain level of income they need all of it and let's not squabble about marginal benefits and who gets what docked and isn't it unfair. Let them pay the same tax rate as the working people sweating for a living, but adjust the income tax threshold so that they get all the State will give them plus some extra that they have saved for themselves; then, 40% or so above that limit.
It would work out so that for example someone on a total income that is £28,756 into the 40% tax bracket would be repaying the full cost of a basic State Pension which is currently £11,02.40. Someone less wealthy would be paying a proportion, naturally.
It's the KISS principle: Keep It Simple, Stupid.
