Excellent analysis - including the best, disinterested analysis of the employers' NICS chnages I have seen. PS: what a talented family the Freemans are! Great communicators as well as experts in their respective fields.
The changes to NICS will, no doubt, move the UK in the direction of what has happened in the US with regular employment.
In the US, most large tech companies (Nvidia, Intel, Apple, etc.) hire employees under two types of employment. One is full time employment which is accounted for as a capital expense. For this type of employment, the employer must pay half of medicare, disability insurance and social security. The other half is paid for by the employee.
The other type of employment is contract employment which is mostly provided by "body shops" which provide contracted employees to these tech companies.
Contracting companies generally hire workers through the H-1B visa program. Most of these employees (more than 60%) come from India. The "body shops" pay these H-1B workers about half the market rate. Through various means, the "body shops" pay little into medicare, disability insurance or social security. The large tech companies that hire from these "body shops" love this system because it helps them avoid paying for medical, disability insurance and social security. It is also not seen by Wall Street as a recurring capital expense (Cap Ex). Instead, it is seen as a one time operational expense (Op Ex).
Wall Street loves Op Ex and hates Cap Ex. They especially hate Cap Ex when it is due to high "head count", ie. companies with high numbers of regular employees.
Undoubtedly, companies in the UK will respond to the NICS changes by reducing the number of regular employees they have on their payrolls. No doubt, there are the equivalent of the American H-1B "body shops" in the UK, ready to exploit the eagerness of companies to reduce the number of regular employees on their payrolls.
While I agree with all of the parts of this I understand, I am curious if Prof Freedman could add more on the practical/political challenges of implementing this stuff and lessons from abroad.
Are there countries which have walked her suggested path of an independent Office of Tax Options (as I am renaming it, apologies)? And, perhaps more importantly, are there clear cautionary tales of countries which tried and failed? What were their key mistakes we could avoid?
Family Coherence, Cohesion and Collective intelligence in evidence with every word "Mum" Freedman and a delight to read.
Pity the government seems to be lacking in every such "C"!
Labour could probably have won hands down in the last election without any such silly, self-limiting promises given Tory performance and implosion.
Then you realize that they lacked 2 essential "Cs" for their political existence, Confidence in themselves and indeed the British people and a Chief to drive them forward.
Agreed, especially about Labour restricting itself with unnecessary promises on tax. This is the result of adhering to the Roy Jenkins’ ‘Ming Vase’ theory about Labour’s path to electoral victory. When Jenkins made that comment, no Tory administration had made anything like the mess we have seen since 2010. Starmer could have simply said ‘we’ll wait and see what they’ve left’ before making any tax promises. Voters were so anxious to boot out the Tories that Labour would have won anyway.
I agree Professor. Rachel Reeves tide herself in knots before the election. Rather than making employment more expensive and a killer for small businesses, she could have merely reversed the cut in NI to employees given by Hunt in the dying days of the last government. As to farmers, so many small farmers, the ones we need to protect our countryside (not the Dyson’s et al) are land and equipment rich but salary tiny, some as low as £40,000 a year. If they sell off their land or equipment to pay taxes, how can they survive at all? We have a lack of joined up thinking and lack of long term thinking in our politicians that never seems to improve. Getting back into the Single Market and admitting what a disaster Brexit has been might be a start. We are living in a dangerous world, we need to spend more on defence and we need our friends in Europe as they need us, if we are to resist the rise of the far-right and misinformation. And we need to help bottom up not top down, give people in poverty hope that things can get better. The far- right feeds on the left behind.
I really enjoyed (and completely agree with) this. I'm probably more interested in tax policy than most non-experts because both my parents worked for the Inland Revenue (they met at work so in some sense I'm a "tax baby"). My dad was with the IR from around 1948-1984, and I can remember him complaining about the huge expansion in exemptions and complication even during that period. I suspect that very few tax payers have much idea as to how the tax system works - especially NI, but in some cases even what tax bands actually mean. Using PAYE tax codes doesn't help with this - I can see why we had them during my parents time (when all the calculations were done with pen & paper), but it makes no sense now with computerisation to keep with this system. I wonder how many on PAYE have any idea at all what their tax code actually means? Also NI has always struck me as very unfair - why is there (a relatively low) upper ceiling, why do workers over 66/67 not have to pay it, why isn't it paid on interest, dividends, etc. A new, combined income tax /NI would be a lot fairer, but politically impossible with widespread general ignorance of how things work - and a lot of right-wing commentators & journalists ready to exploit that.
The idea of an Office of Tax Policy is a brilliant simple one to depoliticise this critical issue.
Ideally we can strip taxation back to the sort of first principles (you mentioned Smith) that never seem to be talked about. The alternative is something we can already see us being partly enmeshed, a future akin to the labyrinthine tax code that they have in the US, where everyone has to do an annual tax return and wade through complexity.
One area that I would highlight here is the need to always encourage risk-taking, ie entrepreneurship. Almost all those who design and implement tax policy are in employment and in secure employment, as were those who designed the furlough system in Covid that saw 2-3mm people left with (effectively) zero support as they had followed the advice of HMRC and their accountants to pay themselves £9,100 in salary per year and the balance in dividends through their limited company.
We have already seen a drop in entrepreneurial activity from those who would otherwise run micro and small businesses after that abandonment during covid as people seek secure employment on a salary. The same has applied in hospitality and other areas of hourly paid and varied hours employment.
How can we, then, give incentives through the tax system for those who take the risk?
Setting up a small Limited company used to be one way. You don't get vacation, sick, maternity or other pay and benefits when you work for yourself, so the thinking is "give them a way that they don't have to pay NIC" (and yes, I wish we could abandon NIC and just fold it all into income tax, but we will have to first educated people that it does not pay for the NHS or their pension!).
There used to be financial benefits through tax and NIC if you were set up that way, but that has been chipped away at so that the difference is now small, the savings being in Employers NIC only (effectively).
Am not looking for a discussion on solutions to this area, simply outlining it as one example where we have lost our way in providing tax incentives to encourage certain behaviours, in this case taking the risk to set up your own thing, to be entrepreneurial.
Oh, and on that, a reminder of the tax cliff at ~£100k for people set up as Ltd companies. The effective tax rate is now 60.25% (26.5% marginal CT plus 33.75% Dividend tax). Punchy.
Due to the fact that no one else has commented on this completely regressive decision, I'm am going to requote this section of Professor Freedman's article:
"The decision to raise revenue in this way is strange, not only due to this economic inefficiency, but also because of its distributional impact and its direct clash with the Government’s objectives for encouraging those now economically inactive back into work. This threshold change plus the rate rise increases the cost of employing the lowest paid and part-time workers more than it does for average and higher earners.
"The pre-Budget threshold was high and there might have been scope for some reduction over time, but to do this so rapidly when also increasing the minimum wage is a real deterrent to the maintenance or increase in part-time work at the lower end of the pay scale, such as hospitality and care workers.
"Until April 2025 a part-time employee on minimum wage can work 15 hours per week before NICs kick in whereas after April 2025 it will be just 8 hours."
I note that, due to the fact that women take on a greater proportion of care work, they often can only take on part time work. They are often low paid. Furthermore, due to greater care obligations during the pandemic, the burden of caring for family members increased. Many women are still recovering from this, likely hoping to reenter the workforce, yet still unable to work full time. In light of this, increasing the tax on low paid and part time work seems highly regressive.
What is it about society that we so hate and disenfranchise women's part time work?
Is the Labour Party really pro-labour? And if they still think so, are they advocates for the types of labour that predominantly fall upon women? It seems not.
As a retired accountant who dealt with small businesses I found that clients didn’t understand how the tax system worked. That also applies to a lot of people at the Treasury! It wasn’t until 2010 with the coalition that the starting point for paying tax was increased to a reasonable level. This was something that Labour should have championed.
When Gordon Brown introduced the £10,000 tax free band for companies I thought that it was either a cynical ploy to get everyone on to PAYE or a misguided Treasury policy to encourage entrepreneurship. I was told that it was the latter. It resulted in people incorporating their businesses and a vast reduction in tax paid until it was corrected.
When Liz Truss was Chief Secretary to the Treasury she was on The Westminster Hour complaining that people earning between £50,000 and £80,000 were having half of this band of income taken by the government. The correct figure was 42%.
The overall Budget strategy was fine but I was shocked by the reduction in the starting point for paying Employer’s NI. This part of the tax increase should have been met by other increases on pension contributions, fuel duty, and employee’s NI, not businesses. As individuals only pay national insurance at 2% on earned income over £50,000 I have been surprised that this hasn’t been increased.
Employers will reduce their levels of employment and salary increases this year, which will have the same effect as increases in individual levels of net pay.
It will be interesting to see if there are any attempts to make much needed tax simplification in the next few years. With the current people in the Cabinet and Minister level I am not sure that there is anyone with the knowledge to attempt this.
So sensible. The problem is surely that politicians lack both the nerve and inclination for radical change. The lack of nerve is as you've described, but the lack of inclination is because governments like the complexity so they can use and abuse it to play games to raise money in often disguised or misleading ways.
Thus you have Gordon Brown's games with pensions, and the number of governments that have tried to make out there is some radical difference between NI and income tax for most people. The idea NI still has some link to the NHS still has resonance for many, but is of course nonsense.
There are of course differences in liability, most actually unsustainable in principle, but none so big that it wouldn't be better if NI was folded into Income Tax, creating both fairness and simplicity.
So the dirty truth is that politicians want complexity so they can play games of taking and giving, and to hell with the long-term.
I did wonder whether the Employer NICs decision was an intentional play to suppress private sector wage growth in the short term, in order to reduce public sector pay pressures and inflation, while waiting for the planning and other reform measures to boost growth?
The core of the problem seems to be the Government's pre-election promises to not increase any of the main sources of tax revenue. Whisper it in dark corners, but there is a way that the Government can increase tax revenue without breaching any of its election promises... devolve more public service responsibilities to local authorities and grant them the genuine tax-raising powers they need to provide those public services.
This would also achieve the important goal of genuinely devolving power down from central government to local government.
Very good article. It highlights exact what Sam found in his book re: the inability of the state governed by short term politicians to face the need for long term reform. Tax is a very difficult area to get right but principles of operation are key. We don't have this as it's a political football. The smaller state envisaged by the Tories comes at no cost to the quality of services they say as 'efficiency' and 'productivity' will increase. Total BS and they know it but the won't tell us which arm will be chopped off to pay for it. Labour similarly want service expansion to meet evident need but won't tell the truth that the aging population means more tax. Instead the fantasy that AI will achieve the desired savings when in reality it will merely shift resources not save. Growth is required but sustainable growth, so while production of unhealthy food = growth, it leads to higher health costs later is merely one example. As we can see on the environment govts it seems need total melt down before they will act to address a problem now to avoid a bigger cost later.
Hello Sam, I was hoping for an analysis as to why we in the West can ignore wealth taxes when something like 40% of wealthy people think they would be a good thing. The ease with which wealthy people could move their wealth is given as the main reason yet what is 2% of declared wealth to someone worth millions? The same is true of the higher rates of tax. Ever since Thatcher’s time when the 60% rate of income tax was reduced to 40% we have been cursed with multi-millions being paid to CEO’s and Partners in business enterprises where professional tax accountants make a good living preventing anything like 40% tax being gathered. The Tax Options required here are how to make these people pay the same proportion of their salaries as the wage slave on PAYE.
Taxes on capital are a good idea and we should make ours work better (cgt and iht). Wealth taxes are different- hard to implement and actually don’t bring in much revenue. To bring in big amounts I’m afraid we need to tax income.
Excellent, insightful and depressing piece, in an all too familiar way with the Freedman clan
One almost thinks the only way to improve taxation with a massive re-set in how we tax, with people losing one way but gaining in others eg introducing a proper property and land value tax but perhaps scraping stamp duty and iht.
Only way that will happen is if there's a massive fiscal crisis, which may happen sooner than we think.
Agreed. Given that democracy appears to be going out of favour these days perhaps the family might make a good case for the formation of a beneficent oligarchy?
Excellent analysis - including the best, disinterested analysis of the employers' NICS chnages I have seen. PS: what a talented family the Freemans are! Great communicators as well as experts in their respective fields.
The changes to NICS will, no doubt, move the UK in the direction of what has happened in the US with regular employment.
In the US, most large tech companies (Nvidia, Intel, Apple, etc.) hire employees under two types of employment. One is full time employment which is accounted for as a capital expense. For this type of employment, the employer must pay half of medicare, disability insurance and social security. The other half is paid for by the employee.
The other type of employment is contract employment which is mostly provided by "body shops" which provide contracted employees to these tech companies.
Cognizant is one of many "body shops":
https://cis.org/Miano/Look-Behind-Curtain-One-H1B-Body-Shop
Contracting companies generally hire workers through the H-1B visa program. Most of these employees (more than 60%) come from India. The "body shops" pay these H-1B workers about half the market rate. Through various means, the "body shops" pay little into medicare, disability insurance or social security. The large tech companies that hire from these "body shops" love this system because it helps them avoid paying for medical, disability insurance and social security. It is also not seen by Wall Street as a recurring capital expense (Cap Ex). Instead, it is seen as a one time operational expense (Op Ex).
Wall Street loves Op Ex and hates Cap Ex. They especially hate Cap Ex when it is due to high "head count", ie. companies with high numbers of regular employees.
Undoubtedly, companies in the UK will respond to the NICS changes by reducing the number of regular employees they have on their payrolls. No doubt, there are the equivalent of the American H-1B "body shops" in the UK, ready to exploit the eagerness of companies to reduce the number of regular employees on their payrolls.
Thanks- I agree. We have this problem already. The NICs changes will exacerbate it.
Sad!
An excellent bonus to have an additional Freedman in this Substack. When are the twins going to be roped in? What will be their subject?
Sam may be unrelictant as this stage given his name on their phone contacts is 'bitch'. The full story may come out 😉
While I agree with all of the parts of this I understand, I am curious if Prof Freedman could add more on the practical/political challenges of implementing this stuff and lessons from abroad.
Are there countries which have walked her suggested path of an independent Office of Tax Options (as I am renaming it, apologies)? And, perhaps more importantly, are there clear cautionary tales of countries which tried and failed? What were their key mistakes we could avoid?
Perhaps the US Congressional Budget Office https://www.cbo.gov/publication/60869
Yes that is not at all a bad model although what happens next in the USA not so much!
Family Coherence, Cohesion and Collective intelligence in evidence with every word "Mum" Freedman and a delight to read.
Pity the government seems to be lacking in every such "C"!
Labour could probably have won hands down in the last election without any such silly, self-limiting promises given Tory performance and implosion.
Then you realize that they lacked 2 essential "Cs" for their political existence, Confidence in themselves and indeed the British people and a Chief to drive them forward.
Agreed, especially about Labour restricting itself with unnecessary promises on tax. This is the result of adhering to the Roy Jenkins’ ‘Ming Vase’ theory about Labour’s path to electoral victory. When Jenkins made that comment, no Tory administration had made anything like the mess we have seen since 2010. Starmer could have simply said ‘we’ll wait and see what they’ve left’ before making any tax promises. Voters were so anxious to boot out the Tories that Labour would have won anyway.
I agree Professor. Rachel Reeves tide herself in knots before the election. Rather than making employment more expensive and a killer for small businesses, she could have merely reversed the cut in NI to employees given by Hunt in the dying days of the last government. As to farmers, so many small farmers, the ones we need to protect our countryside (not the Dyson’s et al) are land and equipment rich but salary tiny, some as low as £40,000 a year. If they sell off their land or equipment to pay taxes, how can they survive at all? We have a lack of joined up thinking and lack of long term thinking in our politicians that never seems to improve. Getting back into the Single Market and admitting what a disaster Brexit has been might be a start. We are living in a dangerous world, we need to spend more on defence and we need our friends in Europe as they need us, if we are to resist the rise of the far-right and misinformation. And we need to help bottom up not top down, give people in poverty hope that things can get better. The far- right feeds on the left behind.
I really enjoyed (and completely agree with) this. I'm probably more interested in tax policy than most non-experts because both my parents worked for the Inland Revenue (they met at work so in some sense I'm a "tax baby"). My dad was with the IR from around 1948-1984, and I can remember him complaining about the huge expansion in exemptions and complication even during that period. I suspect that very few tax payers have much idea as to how the tax system works - especially NI, but in some cases even what tax bands actually mean. Using PAYE tax codes doesn't help with this - I can see why we had them during my parents time (when all the calculations were done with pen & paper), but it makes no sense now with computerisation to keep with this system. I wonder how many on PAYE have any idea at all what their tax code actually means? Also NI has always struck me as very unfair - why is there (a relatively low) upper ceiling, why do workers over 66/67 not have to pay it, why isn't it paid on interest, dividends, etc. A new, combined income tax /NI would be a lot fairer, but politically impossible with widespread general ignorance of how things work - and a lot of right-wing commentators & journalists ready to exploit that.
Bravo, Professor Freedman!
The idea of an Office of Tax Policy is a brilliant simple one to depoliticise this critical issue.
Ideally we can strip taxation back to the sort of first principles (you mentioned Smith) that never seem to be talked about. The alternative is something we can already see us being partly enmeshed, a future akin to the labyrinthine tax code that they have in the US, where everyone has to do an annual tax return and wade through complexity.
One area that I would highlight here is the need to always encourage risk-taking, ie entrepreneurship. Almost all those who design and implement tax policy are in employment and in secure employment, as were those who designed the furlough system in Covid that saw 2-3mm people left with (effectively) zero support as they had followed the advice of HMRC and their accountants to pay themselves £9,100 in salary per year and the balance in dividends through their limited company.
We have already seen a drop in entrepreneurial activity from those who would otherwise run micro and small businesses after that abandonment during covid as people seek secure employment on a salary. The same has applied in hospitality and other areas of hourly paid and varied hours employment.
How can we, then, give incentives through the tax system for those who take the risk?
Setting up a small Limited company used to be one way. You don't get vacation, sick, maternity or other pay and benefits when you work for yourself, so the thinking is "give them a way that they don't have to pay NIC" (and yes, I wish we could abandon NIC and just fold it all into income tax, but we will have to first educated people that it does not pay for the NHS or their pension!).
There used to be financial benefits through tax and NIC if you were set up that way, but that has been chipped away at so that the difference is now small, the savings being in Employers NIC only (effectively).
Am not looking for a discussion on solutions to this area, simply outlining it as one example where we have lost our way in providing tax incentives to encourage certain behaviours, in this case taking the risk to set up your own thing, to be entrepreneurial.
Oh, and on that, a reminder of the tax cliff at ~£100k for people set up as Ltd companies. The effective tax rate is now 60.25% (26.5% marginal CT plus 33.75% Dividend tax). Punchy.
Due to the fact that no one else has commented on this completely regressive decision, I'm am going to requote this section of Professor Freedman's article:
"The decision to raise revenue in this way is strange, not only due to this economic inefficiency, but also because of its distributional impact and its direct clash with the Government’s objectives for encouraging those now economically inactive back into work. This threshold change plus the rate rise increases the cost of employing the lowest paid and part-time workers more than it does for average and higher earners.
"The pre-Budget threshold was high and there might have been scope for some reduction over time, but to do this so rapidly when also increasing the minimum wage is a real deterrent to the maintenance or increase in part-time work at the lower end of the pay scale, such as hospitality and care workers.
"Until April 2025 a part-time employee on minimum wage can work 15 hours per week before NICs kick in whereas after April 2025 it will be just 8 hours."
I note that, due to the fact that women take on a greater proportion of care work, they often can only take on part time work. They are often low paid. Furthermore, due to greater care obligations during the pandemic, the burden of caring for family members increased. Many women are still recovering from this, likely hoping to reenter the workforce, yet still unable to work full time. In light of this, increasing the tax on low paid and part time work seems highly regressive.
What is it about society that we so hate and disenfranchise women's part time work?
Is the Labour Party really pro-labour? And if they still think so, are they advocates for the types of labour that predominantly fall upon women? It seems not.
As a retired accountant who dealt with small businesses I found that clients didn’t understand how the tax system worked. That also applies to a lot of people at the Treasury! It wasn’t until 2010 with the coalition that the starting point for paying tax was increased to a reasonable level. This was something that Labour should have championed.
When Gordon Brown introduced the £10,000 tax free band for companies I thought that it was either a cynical ploy to get everyone on to PAYE or a misguided Treasury policy to encourage entrepreneurship. I was told that it was the latter. It resulted in people incorporating their businesses and a vast reduction in tax paid until it was corrected.
When Liz Truss was Chief Secretary to the Treasury she was on The Westminster Hour complaining that people earning between £50,000 and £80,000 were having half of this band of income taken by the government. The correct figure was 42%.
The overall Budget strategy was fine but I was shocked by the reduction in the starting point for paying Employer’s NI. This part of the tax increase should have been met by other increases on pension contributions, fuel duty, and employee’s NI, not businesses. As individuals only pay national insurance at 2% on earned income over £50,000 I have been surprised that this hasn’t been increased.
Employers will reduce their levels of employment and salary increases this year, which will have the same effect as increases in individual levels of net pay.
It will be interesting to see if there are any attempts to make much needed tax simplification in the next few years. With the current people in the Cabinet and Minister level I am not sure that there is anyone with the knowledge to attempt this.
I hope to see more occasional posts from this Professor.
Would discussion of tax be something for a citizens assembly? Suitably informed by such persons as Judith envisaged in her Advisory Office?
So sensible. The problem is surely that politicians lack both the nerve and inclination for radical change. The lack of nerve is as you've described, but the lack of inclination is because governments like the complexity so they can use and abuse it to play games to raise money in often disguised or misleading ways.
Thus you have Gordon Brown's games with pensions, and the number of governments that have tried to make out there is some radical difference between NI and income tax for most people. The idea NI still has some link to the NHS still has resonance for many, but is of course nonsense.
There are of course differences in liability, most actually unsustainable in principle, but none so big that it wouldn't be better if NI was folded into Income Tax, creating both fairness and simplicity.
So the dirty truth is that politicians want complexity so they can play games of taking and giving, and to hell with the long-term.
I did wonder whether the Employer NICs decision was an intentional play to suppress private sector wage growth in the short term, in order to reduce public sector pay pressures and inflation, while waiting for the planning and other reform measures to boost growth?
The core of the problem seems to be the Government's pre-election promises to not increase any of the main sources of tax revenue. Whisper it in dark corners, but there is a way that the Government can increase tax revenue without breaching any of its election promises... devolve more public service responsibilities to local authorities and grant them the genuine tax-raising powers they need to provide those public services.
This would also achieve the important goal of genuinely devolving power down from central government to local government.
Maybe but I think people would notice….
Very good article. It highlights exact what Sam found in his book re: the inability of the state governed by short term politicians to face the need for long term reform. Tax is a very difficult area to get right but principles of operation are key. We don't have this as it's a political football. The smaller state envisaged by the Tories comes at no cost to the quality of services they say as 'efficiency' and 'productivity' will increase. Total BS and they know it but the won't tell us which arm will be chopped off to pay for it. Labour similarly want service expansion to meet evident need but won't tell the truth that the aging population means more tax. Instead the fantasy that AI will achieve the desired savings when in reality it will merely shift resources not save. Growth is required but sustainable growth, so while production of unhealthy food = growth, it leads to higher health costs later is merely one example. As we can see on the environment govts it seems need total melt down before they will act to address a problem now to avoid a bigger cost later.
Hello Sam, I was hoping for an analysis as to why we in the West can ignore wealth taxes when something like 40% of wealthy people think they would be a good thing. The ease with which wealthy people could move their wealth is given as the main reason yet what is 2% of declared wealth to someone worth millions? The same is true of the higher rates of tax. Ever since Thatcher’s time when the 60% rate of income tax was reduced to 40% we have been cursed with multi-millions being paid to CEO’s and Partners in business enterprises where professional tax accountants make a good living preventing anything like 40% tax being gathered. The Tax Options required here are how to make these people pay the same proportion of their salaries as the wage slave on PAYE.
Taxes on capital are a good idea and we should make ours work better (cgt and iht). Wealth taxes are different- hard to implement and actually don’t bring in much revenue. To bring in big amounts I’m afraid we need to tax income.
Excellent, insightful and depressing piece, in an all too familiar way with the Freedman clan
One almost thinks the only way to improve taxation with a massive re-set in how we tax, with people losing one way but gaining in others eg introducing a proper property and land value tax but perhaps scraping stamp duty and iht.
Only way that will happen is if there's a massive fiscal crisis, which may happen sooner than we think.
Agreed. Given that democracy appears to be going out of favour these days perhaps the family might make a good case for the formation of a beneficent oligarchy?