News and Analysis | Author: David Macdonald | 6 March 2024

Using a spanner to tighten a screw…

It’s very welcome to see the Chancellor reducing National Insurance Contributions (NICs) instead of Income tax. NICs are a tax on workers and employers whereas income tax applies to all forms of taxable income such as that paid by better-off pensioners and investors. At least this NIC change reduces the ever-increasing tax burden that is being placed on the wealth-producers in the economy.

There is a myth that NICs pay for pensions, the NHS and the like. Nothing of the sort – it all goes into one big pot along with all other taxation to be spent wherever it needs to be. Same with road tax – if it was spent on roads then why do some regions have almost perfect roads compared with others that are more cratered than the moon?

The demographics of the country and the needs of society, and indeed the planet are not served by an incongruous taxation system that is no longer fit for purpose. The Chancellor is sticking with a decades-old tool-kit to try and solve 21st and 22nd century problems with it. For one: pension obligations will not be sustainable for our young-people with a pay-as-you-go tax basis. Once-upon-a-time when all the baby-boomers were in work, paying taxes and we could rely on people to die in their late 60’s and early 70’s it was all tickety-boo. Now though, and increasingly, there are just not enough tax-payers in the system as the ‘boomer’ generation live 20-year retirements and we have a low birth rate[1]. The pensions problem is one illustration that the Exchequer tries to fix with a very dysfunctional and out-of-date set of revenue streams. The older and wealthier in our society get the best tax-breaks and highest pensions whilst the workers and entrepreneurs pay for them with an increased and unsustainable tax-burden.

Another systemic problem with the tax tool-kit is illustrated by the amount of tax raised from fossil fuels. Many will wonder why the government continues to give R&D tax credits to the oil industry for exploiting new oil fields. Also why, with a net-zero obligation baked into law, did the current government back-track on the ban of new internal combustion engine (ICE) from 2030 and push it back to 2035? Why did they not bid enough in 2023 for offshore wind such that there were zero bids for the new operating licenses up for auction. What they are not telling us is that about £24bn (est. £28bn for 2024) in tax is raised from fuel duty surcharge alone. That’s 2.3% of all tax revenue and government spending. Equivalent to several pence off NICs! So what we have here is a turkeys-voting-for-Christmas scenario where the moral obligation of the government is compromised by the fact that they are being rewarded by the very thing that they need to get rid of! In fact, the revenue raised from tax on oil company profit is dwarfed by the tax paid by consumers. Depending on the year in question[2][3], tax on oil production ranges from practically nothing to up to only about a third of end-user tax paid at the pumps. So “hooray” for stealth tax on consumers – but “shame” on the fact that there is a moral bankruptcy behind it. Because it’s the end-users that pay the tax rather than our own North Sea oil companies who cares if our own production dries-up? We can just import it and the tax take won’t get affected. We could just as well subsidise the importing of cocaine. As long as we tax an addicted end-user with no access to an alternative then we’ll have a steady revenue. It’s reliable but it does not make it right.

You would not invent this basis of tax if you started with a blank sheet of paper so why do we keep it? It’s a bit like relying on a tax on stage-coaches after trains were invented. Like, duh, maybe we’d better change something? Or at least be honest about it. The rise of the EV is unstoppable at this point. Even after Rishi Sunak’s back-peddling on 2030 net-zero, Ford were like “meh, so what, were cracking on with EV since that’s the way forward”. Better to instigate change now rather than be caught out.

At a recent talk hosted by not-for-profit charity facilitators Global Returns Project, Jonathan Porrit and Prof. Chris Rapley made the point that there is no reason why, from an energy perspective, the world is not already net zero. The technology exists. The money to make it happen exists (it’s just that 80% of it is deployed in unhelpful areas!). They went on to make the point that only factors stopping it are the fossil fuel industry and government. As we can see, these two actors are in a co-dependent relationship. A bit like two drunks holding each other up. Mindful citizens however will realise that their money can make a difference. Just as Ford dismissed the ICE row-back – market forces are inevitable. Where governments and the oil lobby try to stand in the way of progress, capital will move to where the future is. That’s why we exist to encourage investors and people with pensions to move their money and accelerate the journey the planet needs, to see and to generate superior investment returns for themselves whilst that are at it.

There is a hideous and growing burden on today’s tax-payer. One in six people work for the government, generally with an expectation of a very generous pension. They, along with everyone else, regardless of wealth or other income are also entitled to a State pension. With the ‘triple-lock’, this pension liability is getting out of control. It’s time to confront some uncomfortable truths. Not only are the other 5/6ths paying for the salaries of the government workers they are paying for their pensions too.

 

Sources

[1] Life Expectancy Data: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2020to2022#:~:text=These%20show%20that%20life%20expectancy,%2C%20respectively%2C%20estimated%20in%202019.

[2] Institute for Fiscal Studies, Forecast composition of government revenue, 2023-24:
https://ifs.org.uk/taxlab/taxlab-key-questions/where-does-government-get-its-money

[3] Historic UK government net revenues from oil and gas production in the UKCS:
https://www.gov.uk/government/statistics/government-revenues-from-uk-oil-and-gas-production–2/statistics-of-government-revenues-from-uk-oil-and-gas-production-september-2023#:~:text=total%20government%20revenues%20from%20UK,increase%20of%20%C2%A37.6%20billion

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