Reforming tax for the self-employed should be welcomed by progressives and fiscal hawks alike

Published on Tax and Welfare

Raising taxes is hard for Chancellors to do. That shouldn’t be a surprise; saints aside, most human beings would rather not have less cash in their pocket. But that can’t be the end of any discussion on tax, unless you’d rather not have any schools, roads or the NHS.

That’s why it’s time to put some perspective back into the political hot air that has followed the Chancellor’s decision to raise National Insurance for the self-employed, because this change is fundamentally the right thing to do.

The first part of that perspective is to recognise that this is a tiny tax rise. £200 million a year is a lot to you and me, but is lost in the roundings at the Treasury. For example it pales into insignificance compared to the more than £12 billion worth of benefit cuts being rolled out over the next few years that mean the incomes of the bottom third of working-age households are expected to actually fall – a fact not exactly filling the front pages of newspapers.

Second, this tax rise is progressive. Those earning less than £16,250 are unaffected or gaining. Because the self-employed have typical earnings of just under 14,000 this means over half will be better off or unaffected by these coming changes – including two thirds of all self-employed women. And because rate increases fall heaviest on the higher earners, over half of the overall tax increase will come from the richest 10 per cent of households meaning a (very small) reduction in inequality.

Third, there are some differences in the benefits that the self-employed are entitled to compared to employees, but that gap has narrowed hugely in recent years. This tax increase needs to be seen in the context of the new single tier state pension – which came in last April. This closes by far the biggest remaining benefit differences between the self-employed and employees.

Fourth, because this tax rise is so tiny, it’s worth reflecting on why the Chancellor is acting. It can’t be just to raise revenue, because there are hundreds of easier ways to do that like scrapping expensive and unwise corporation tax cuts between now and 2020 that would raise £5bn.

So the Chancellor’s action is not about the revenue raised but the incentives changed. He and many others rightly recognise that fast growing self-employment combined with a much lower tax take for each person that is self-employed is posing an ever growing risk to our public finances. Or to put it another way, to everyone else’s tax bill and public services.

Fifth, and crucially, even after this change self-employment will still be heavily incentivised by much lower national insurance bills. That’s partly because they will still pay only 11 per cent compared to the 12 per cent paid by employees. But much more importantly it reflects the fact that there is no equivalent of employer national insurance (a 13.8 per cent tax on wages) when it comes to self-employment. Overall, the Treasury is still forecast to lose around £6 billion each year from this favourable tax treatment.

Now of course the Treasury could have done a better job. They should have been open that this was a breach of the 2015 manifesto – but honest too that the reason for this is that is the world has changed. If you favour total transparency, you could also argue – as some of its authors have – that the manifesto commitment was very silly in the first place. You’d be right.

Also better would have been if the changes were part of a wider set of reforms, looking at the full picture of self-employed taxation and giving the self-employed more support with the likes of maternity pay and private pension saving. Increasing such support for the self-employed is an important part of how we update our tax, benefit and employment laws for the 21st Century world of work. A new consultation on parental benefits for the self-employed may lead to welcome improvements in this area.

But those reasonable criticisms of how the Chancellor’s self-employment National Insurance rise has been handled are totally different to most of the opposition to this change – which is that it is wrong to try and narrow the large tax gap between the self-employed and employees. Far from it, on both fairness grounds and to protect the public finances, narrowing that gap is the right thing to do.

This blog originally appeared on the New Statesman’s Staggers blog