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The coronavirus crisis could open the window for long overdue tax reform

The chancellor is right to suggest tax reform might be the trade-off for coronavirus support for the self-employed

The chancellor is right to suggest tax reform might be the trade-off for coronavirus support for the self-employed, says Joe Marshall 

On 26 March, the chancellor, Rishi Sunak, announced a package of economic measures to support the self-employed through the coronavirus crisis. He announced that the government will pay self-employed people 80% of their past average income (up to £2,500 a month), provided their past profits were below £50,000 a year. This support is similar to that offered earlier to employees.

The complexity of reaching the self-employed meant this package took longer to put together than the measures of support set out for employees, but it is actually more generous because the self-employed are eligible even if they continue working through the crisis.

Announcing the measures, the chancellor argued that ‘we are all in this together’ and hinted that the trade-off for providing comparable financial support for the employed and self-employed could be an increase in national insurance contributions (NICs) for the self-employed.

Sunak is right to question the fairness of the current tax system. He would also be right to propose reforms. As his predecessors at the Treasury will warn, however, the challenge is putting those reforms into practice.

There is increasingly little justification for special tax treatment for the self-employed

Up to now, the self-employed have paid lower rates of NICs than employees. In the chancellor’s words, there is:

‘currently an inconsistency in contributions between self-employed and employed, and obviously the actions taken today… treating [the self-employed] in the same way as those who are employed…  throw into light that question of inconsistency and whether that is fair to everybody going forward.’

Historically, the self-employed were eligible for less generous state benefits – such as the state pension – than the employed, justifying lower NICs. However, in recent years, these differences have been eroded, meaning there is little economic justification for special tax treatment for the self-employed. The coronavirus measures announced by the chancellor strengthen the case for reform.

The Resolution Foundation and the Institute for Fiscal Studies have estimated that the cost of the measures announced to support the self-employed could total £10bn. A huge sum, but roughly equivalent to just two years’ worth of the revenue lost from lower self-employed NICs contributions.

Rishi Sunak should learn from the mistakes of Philip Hammond

Sunak appeared to be preparing the ground to resurrect Philip Hammond’s attempt to increase NICs for the self-employed in 2017. The then chancellor argued that:

‘the difference in national insurance contributions is no longer justified by the difference in benefit entitlements. Such dramatically different treatment of two people earning essentially the same undermines the fairness of the tax system.’  

Despite the fact that the policy would still have left the self-employed with a substantial tax advantage relative to employees, he was unable to hold the position, in large part because the policy appeared to contradict the 2015 Conservative manifesto and was portrayed as an attack on ‘white van men and women’. Within a week, Hammond had to make a U-turn, in the face of strong parliamentary and media opposition.

So what did Hammond get wrong? As we argued at the time, too little effort was made to prepare the ground for that reform. Sunak has the opportunity to do things differently, and he also has the benefit of a strong parliamentary majority to ease the way.

It is encouraging that the current chancellor also seems to have learned from Hammond’s experience and sought to expressly link the support announced on Thursday with possible future tax reform. In our forthcoming report Overcoming Barriers to Tax Reform, we argue that taking advantage of such ‘windows of opportunity’, when tax issues are salient, can make it easier to introduce reforms. It was also heartening to see tax data used to help make the case for government policy, with the chancellor highlighting that the 5% of the self-employed who will not benefit under the scheme (that is, those with incomes over £50,000 a year) have average earnings of over £200,000 per year.

Paying for the state’s response to the coronavirus crisis will make tax reform more urgent

Tax reform was sorely needed before the coronavirus crisis. It is likely to become even more pressing as the UK takes stock of the outbreak’s far-reaching consequences. The government’s economic rescue package will add many billions of pounds to public debt and may lead the public to desire a permanently larger role for the state – with higher spending to increase resilience in the NHS and other public services and a more generous welfare system. That will increase the tax revenues that the government needs to raise and make it even more damaging to allow inefficient and distortionary tax instruments to languish on the statute book.

Former Treasury minister and shadow chancellor Ed Balls “win[ning] the argument for why” is essential if the public are to be convinced public of the need for reform.

The public are, according to opinion polls, overwhelmingly convince by Sunak’s response to the crisis. In turn, the chancellor has started an honest and necessary conversation with the public about the need for change. When the crisis is over, he cannot afford to stop there. 

HM Treasury
Public figures
Rishi Sunak
Institute for Government

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