UK Budget Preview 2: Are employer NICs a tax on ‘working people’?

As the Chancellor rushes to try and make her sums add up, a number of tax rises are being mooted and tested out in the press in advance of the Budget. Some of these – e.g. capital gains tax and inheritance tax – were quite predictable, with Labour seemingly happy to let discussion gather pace by making pledges specifically not to raise taxes on ‘working people.’ Capital gains arise from sales of assets and so are a return on capital and not on labour; and inheritance tax is due on wealth passed from previous generations, and so not a return on the inheritor’s labour. Both clearly are not earned income for their beneficiary, and therefore – according to the Labour manifesto – fair game for tax rises. Who pays a tax and who sends the money to the Government are different things But National Insurance Contributions (NICs)[1] on the employer side are a different matter – even though UK Government is seemingly happy to go on the airwaves to argue that they comply with both letter and spirit of the manifesto.Some of this relies on a distinction that often puts economists on one side of the divide and legal experts and tax officials on the other. It is one thing to establish legal liability for compliance with tax – the formal remittance of the funds and who the Government will pursue if it doesn’t receive the money – and another altogether to establish on whom the burden of the cost of the tax falls.The former is a legally important but economically uninteresting question. If the legal question were the most important criterion, we would be arguing that VAT is a business tax because it is the responsibility of business who sell goods and services to pay over the tax to HMRC to make sure that the right amount is transferred. And in fact that’s how it is organised within HMRC for tax compliance purposes.If the Government really finds this legalistic argument persuasive, I look forward to it increasing VAT on the basis that it is a tax on businesses and not ‘working people.’ There clearly is little chance of that. VAT is obviously a tax on consumption – it’s the purchase of a good or service by the final consumer that creates a liability. The business collects the tax on behalf of the Government, and then remits it to them, essentially becoming a middleperson in this.In the case of employer NICs, the formal liability clearly falls with the employer – hence the name. But the liability arises from the employment of a person, and it is based on the employee’s income. So there is more than a passing link with the employee and their personal circumstances.Tax compliance burdens are often decided on the basis of whom it is easiest to pursue for liability or on whom the least burden will fall. The Government could very well ask every consumer to keep a record of all transactions in a year and ask them to submit a self-assessment of their VAT liability. Of course, if it did so, not only would it be very burdensome to everyone in the country, but it would also probably lead to large under-declaring of liabilities. Instead, the Government piggybacks on the fact that businesses have to keep records of transactions for their own purposes, and instead asks them to keep track of just another line.But this underlines the fact that there are multiple ways of sharing legal burdens for compliance for a particular tax, and those are operational and legislative decisions rather than economic ones. Once they are done, however, they are taken as given.