NIC hike 'one of worst ways to raise tax'

An influential right-leaning thinktank has warned against the planned increase to National Insurance contributions, claiming it is ‘one of the worst ways to raise tax’ and has the potential to be ‘damaging’ to the economy.

With a 1% rise in NI scheduled for April 2011, a new report from Policy Exchange finds that higher employers NI contributions (NICs) has severe, adverse effects on jobs and the economy. The document, called Taxation, Growth and Employment, recommends that the Treasury urgently re-examines its decision.

It reads: ‘Macroeconomic models... find that increasing employers National Insurance dramatically increases unemployment and reduces growth. These effects (also found in the Treasury’s own model) are so powerful that they should be treated very cautiously… Under circumstances where wage growth is already very low it might be particularly difficult for employers to cut wages further in response to a rise in employers’ NIC, and so the key effect might be raised costs of employment, resulting in greater unemployment.’

The report from Policy Exchange – often reported to be Conservative leader David Cameron’s favourite thinktank – goes on to suggest that an increase in VAT may be more economically damaging than a rise in the basic rate of income tax.

‘Some firms will try to absorb some of the effects of a VAT rise: e.g. because they do not operate in competitive markets, or because they are in financial difficulties and need to maintain turnover. Consequently, not all prices will necessarily rise by the same amount, distorting relative prices, re-directing economic activity inefficiently and so reducing growth.’

Andrew Lilico, Policy Exchange’s chief economist, added, ‘Our research suggests that the Government should cancel the scheduled employers NIC rise in light of its damaging effects on employment. It appears to be one of the worst ways to raise tax, and almost all the other options are better.

‘In the 1970s, a consensus formed that raising VAT was less damaging than raising the basic rate of income tax – but it is no longer clear that VAT is preferable, and the Treasury should review the evidence.’

Categories: News , Income Tax , VAT