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A new tax to fund the NHS and Care

September 29, 2016

The NHS currently costs about £130Billion. Every sensible politician agrees that the amount needed will keep on going up, year after year. New drugs and treatment and diagnosis techniques increase the cost pressures of an ageing society. But there is no consensus on how to find the extra money and safeguard it when government finances remain tight. My former parliamentary colleague Norman Lamb, the excellent health spokesperson for the Liberal Democrats, has revived the idea of a tax dedicated to the NHS. At the party’s conference he announced he was setting up a “New Beveridge Group” to consider how a new tax could work. He also confirmed that the Lib Dems want to see an integrated NHS & Care Service.

Details are sketchy at the moment and the names announced so far as members of the group are health practitioners rather than tax experts or economists. It’s also not entirely clear whether they will be looking at options for increasing existing taxes with the proceeds of the increases hypothecated for the NHS or whether they will go further, creating a new tax, with the entirety of its yield dedicated to the NHS. Gordon Brown did the former in his 2002 Budget, raising national insurance contributions by 1% across all incomes. A repeat of such a move would be an easy recommendation but it could only fund a one off uplift in the NHS budget. It would not be sufficient to cover future health cost rises. It would also fail to deliver Norman’s desire to make it plain on everyone’s payslip how much they are paying for the NHS. So I think a new tax would be a better option.

New taxes don’t come around that often and in recent times they have been tiddlers in terms of the revenue raised, just a few billion here and there from the likes of air passenger duty or landfill tax. To raise in excess of £130billion a year requires a behemoth of a new tax, not seen since the introduction of VAT when Britain joined the EEC in 1973. VAT currently raises £115.4Billion making it the second largest source of revenue after income tax on £168.5Billion. The third largest is national insurance (NIC) at £113.7Billion. Setting up a new NHS tax would necessitate a major disturbance to one of these three big existing taxes. The obvious candidate is NIC.

My Liberal hero Lloyd George created national insurance in 1911. It paid for two of the foundation stones of the welfare state, sick pay and unemployment benefit. Later it also became linked to the financing of an earlier Liberal creation, the old age pension. Despite popular myth that it funds the NHS, this has never been the case. When another great Welshman created the NHS in 1948 it was decided that it should be funded from the general range of all taxes. Aneurin Bevan rejected William Beveridge’s attachment to insurance. Now might be the time to convert NIC into the NHS tax that many people already believe exists.

Several obstacles would need to be overcome. First, NIC would have to be shorn of the remaining links to entitlement to the state pension and non means tested Job Seekers Allowance. NHS and social care are both devolved issues and the budgets of the Cardiff, Edinburgh and Belfast governments are adjusted by the now antiquated Barnett Formula. If a dedicated NHS and Care tax is to be introduced, why not devolve the setting of the rate to the devolved governments with the Chancellor being responsible for the rate solely for England? Social care is currently funded via local government (the Coalition started a limited pooling of council and NHS local budgets in 2015 with the Better Care Fund) so a fiscal change would be needed in the local government settlement too. The December 2015 Spending Review announced an optional 2% rise in council tax specifically for social care. But council tax is a regressive tax and it would be better to fund social care from a broad based tax on income.

Making NIC the funder of the NHS & Care Service would enable us to kill two birds with one stone. NIC has for many years effectively been a second form of income tax. But its rules make its operation more complicated and less progressive than income tax. Thanks to the Liberal Democrats the Coalition raised the starting point for income tax to £11,000. The starting point for employee NICs is just over £8,000 – an unfair tax on the lowest paid. Worse, the charging rate of 13.8% drops to just 2% on incomes over £43,000, the same point where income tax doubles to its 40% rate. While income tax is levied on all forms of remuneration, several perks such as company cars escape an NIC charge. Employers also pay NIC and the rules are different here, with different rules again for the self-employed.

Setting up a new NHS tax would enable the charging thresholds and rules to be aligned with income tax, with quieter squeals of anguish from higher earners than if the reform was done as part of a normal Budget. The rates of tax would depend on the amount needed to be raised. The National Audit Office’s latest report on adult social care in England says that current spending is £19Billion. So with an increased NHS budget the target revenue for a combined service would be in the region of £155Billion. HMRC officials would need to work out the tax rate needed to raise this amount. I would want to see a small reduction in the current main 13.8% rate and a rise in the 2% rate on higher incomes. The new tax could be called National Health and Care Contributions, NHCs.

I wish Norman Lamb well with his New Beveridge Group. If they take on board some of my ideas they could at a stroke bring clarity and stability to NHS finances and make our tax system more progressive. Whatever path they choose, I hope they are bold in their recommendations, like the great Liberal himself William Beveridge.

9 Comments leave one →
  1. September 30, 2016 2:19 pm

    If we are to do something for the good of the country and in the name of the NHS, then lets raise taxes to fund the NHS that are the least damaging. It is well established that the least damaging and distorting taxes are those that are levied against rents (resource extraction, the exclusive ownership of prime land).

    Yes, get people to vote for a tax increase, but use the opportunity to restore property taxes to pre-Thatcher levels, and to link them to location values.

    However, my preference would be to properly state the crisis that we are in and use the NHS as one of the reasons for a full-on rethink of our tax and welfare system, and to shift to a tax system where incomes are not taxed until they are at a level that demonstrates some level of excess profit (e.g. above £30k/yr), and with the unearned incomes of property being properly taxed to pay for it. In the time I’ve owned a house in Cambridge, I’ve seen a massive increase in the value of my property of which I would say £200k of it is entirely due to high demand in the area. I should not get to keep all of that money, nor should my family – it is unearned. People should not be paying taxes on their earnings when people are getting money for nothing.

  2. September 30, 2016 8:08 pm

    Thanks Neale. I agree that as a general principle taxes should fall more lightly on incomes (particularly low ones) and more highly on capital accumulation. In this case though I’m proposing one tax to fund one service. Given the amounts involved it can only really be either breaking up income tax into two or rebadging (and increasing) NIC. The only other tax that could do the job is VAT but that would be more regressive than a broad tax like NIC that has a relationship to ability to pay.

    • October 3, 2016 8:24 am

      I agree that VAT is worse. The point still stands. We need a ground up tax and benefits system for the challenges of the 21st century.

      We need a political party (other than the narrow appeal of the Greens) who will stand up and say that we need to get on with making those changes.

      One proposal would be to use the proceeds of land value auctions of land approved for new build. At the moment, planning of large new build can be a bit of a farmers Euromillions. The windfall gains of new build approvals are a joke.

      Even if you only raised 50k on 150,000 homes a year, then that brings in £7.5bn/year (although it would be correct to build this as an ongoing rental payment, so you’d get an additional £375m per year for each year).

      There are multiple benefits:
      – this diverts around £7bn of money creation payments away from the banking sector
      – It captures the resulting interest payments that were freely given the the banks for public use
      – The missing £7bn *could* be spent into circulation (QE for the people) to fund capital investment that we actually need. The need for this QE to make up the short fall in money supply would diminish over time.

      Now the challenge. How many MPs actually understand economic rent, tax incidence, and money creation to be involved in rigorously building a new economy? The LDs had a handful at the cabinet table in 2010, but that opportunity is gone.

      So the question still stands. Use the NHS as a hook to bring in good policy, or use the NHS to do the Tories bidding – namely taxing work while unearned wealth accumulation goes on unabated.

      • Matt permalink
        December 13, 2016 1:41 am

        I think to you’d want to be careful not to discourage the progression of new builds Neale. We don’t build enough houses as it is.

      • December 14, 2016 1:46 pm

        Matt. I totally agree. There are lots of possible way to capture the windfall gains and economic rent that arises from change of use from agriculture. The suggestion above is illustrative of the amounts of windfall gains that are being made and should be captured as a priority – using taxation or equivalent to *remove* distortions from the economy, rather than allowing taxation to add distortion.

        Another would be to shift significant VAT onto resource taxation – but that has international implications.

        On your specific point, we can vary the above example and instead introduce an annual land rent to capture the rental value gained from having planning permission.

        My original example is just the capitalised version of the land rent, but if instead the auction were on the monthly amount to be paid indefinitely (think of it as a replacement for council tax), then this could start, say 2 years after grant of permission.

        This would force the build out when planning has been gained, but could just move the bottleneck up the pipeline to having less developments in the planning pipeline (or so the building industry will say to create sufficient FUD to prevent change).

        The critical issue though is that the UK’s building industry is dysfunctional and uncompetitive. Once they have gained control of a piece of land, they can sit on it – throttling the supply of land. As the master planners and builders they are also preventing innovation and flexibility in what gets built (just look at the number of people who would want to build to their own spec if they could get a plot).

        Imagine instead the local council becoming the beneficial owner at the master planning stage as part of implementing their local plan. They can buy the land by compulsory purchase at an adequate level of compensation (something a bit above agricultural value), and then sell on freehold, or leasehold (with land rent) plots with permission according to the demand and agreed local plan policies.

        Here in Cambridge, we’ve had Northstowe, a local development, take 10 years to get off the ground, while demand is clearly massive, pushing prices up massively in that time – despite the financial crisis.

  3. Andrew Casey permalink
    January 15, 2017 2:17 pm

    An interesting read. However, it may well be that if people knew NIC was linked so directly to funding the NHS that it would create a desire that lower incomes are also seen to contribute to this tax. Even if at a lower rate than the current 12%?

    • January 16, 2017 11:35 pm

      Thanks Andrew. There are certainly issues with the charging base of NIC. That’s why I would equate the liability rules with income tax. But I think it is fine to have different thresholds, bands and rates. Otherwise you may as well just merge the two taxes. I think one of the attractions of dedicating the whole of the the proceeds of a reformed NIC to the NHS and Care is that it would give clarity on the costs of our current system and open up discussion on which areas need reform. I don’t see any case for bringing more low paid people into the NIC net. Rather, I am advocating better off people paying more. Funding care (social services) out of the tax would also relieve pressure on council tax, which is regressive and less fair than NIC.


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