British business may be selfish, but Labour is wrong on NI

Corporate board members don’t quite have a fiduciary duty to oppose tax rises on their companies, but chief executives are hardly likely to be in favour. So, surprise surprise, herds of UK executives are bleating about the dangers of Labour’s planned rise in National Insurance, brilliantly rebranded the “jobs tax” by the Tories. And it has become a major problem for Labour.

Should we listen to business complaints? No, and yes.

No: after all, they would say that, wouldn’t they? As an employer myself, I’m strongly against a rise in NI, which I will have to pay. But I’m also, on the same purely selfish grounds, against a rise in income tax, in VAT, parking charges or the price of milk, against inflation, deflation and mice. Quite rightly, I just get my one vote, and no one is interested in my selfish opposition to any of these things. Ask companies whether they would prefer the tax rise in the form of higher corporation tax instead, and you can guarantee a stony silence from boardrooms.

But yes, there is a reason we should listen: The NI rise is a bad way to pay for the debt crisis. Leaving aside the question of how much of the deficit reduction should come from tax rises and how much from spending cuts, both the employer and employee parts of NI are a poor way to raise additional tax.

Employer NI is, as the Tories insist, a tax on jobs: the more people a company employs, and the more it pays its staff, the more it pays in tax. This at a time when the government claims to be doing all it can to reduce unemployment. My colleague Chris Giles disagrees completely. But while all taxes may, as he points out, be a tax on jobs, there is an adjustment period to new employee taxes during which employees have a lower standard of living, before they can demand higher wages to compensate – particularly at a time when employers are finding it easy to resist wage hikes. Raise employer NI, and there is an immediate incentive for companies to reduce staffing, which is hard (particularly in industries with collective bargaining) to pass on in lower wages. With low inflation, it takes longer to pass this on in future through lower wage rises, too.

Employee NI is also a bad tax. It is a tax on earned income, not paid by those with unearned income. Notting Hill trustafarians, as well as pensioners, thus miss out. Weird when you think about it, but Labour is increasing taxes on labour. If you want to encourage hard work, and discourage lazing about extracting rents, then tax the extraction of rent, not hard work. Duh. It would be far better to raise income tax, which treats income equally – except that Alistair Darling gambled that people wouldn’t notice an NI rise. The chancellor seems to have been right – but companies did notice.

Unfortunately Gordon Brown mishandled the debate spectacularly (EDIT: Dan Roberts sets this out nicely), accusing business of having been “deceived” by the Tories’ plan to pay for the scrapping of the majority of the NI rise through magical mystery savings, supposedly from additional “efficiency” savings (Gerry Grimstone, one of those closely involved in the government’s efficiency plan, insists such savings cannot be conjured up suddenly).

This, of course, is not relevant to corporate concerns: they don’t care whether the next government pays to get rid of NI through efficiency savings, genuine spending cuts or tax rises elsewhere – just as long as it isn’t a tax on them.

Related reading:

UK election 2010: National insurance nonsense FT Money Supply blog

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Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.