Merging National Insurance Contributions and Income Tax: Lessons of History

Alan Peacock and George Peden

Economic Affairs, 2014, vol. 34, issue 1, 2-13

Abstract: This paper is a response to the British Chancellor of the Exchequer's consultation on closer integration of the operation of National Insurance contributions and income tax. Our historical research on proposals for a complete merger of the two systems enables people interested in tax reform to draw on experience and ideas of officials who grappled with issues similar to those facing us today. We show that officials identified the problem of maintaining increasing numbers of elderly people as long ago as 1950, and identify when and why the British government adopted a pay-as-you-go basis for the National Insurance Fund. We conclude that the advantages of National Insurance contributions separate from income tax are not negligible, but that a merger would be fairer than the present system. Our principal concern is that the contributory principle may raise unrealistic expectations regarding state pensions as it encourages a mistaken belief that these are paid from contributions made by pensioners in the past. We therefore recommend that the government should produce an annual statement showing how state pension liabilities are to be met.

Date: 2014
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