The election spat over national insurance – an  income and payroll tax – is becoming more absurd by the day. Even though I argued that the business case for avoiding the national insurance rise was so weak it had to be an April fool, Gordon Brown has done himself no favours by also suggesting British business leaders are idiots. In the usual election claim and counter-claim, there are three important principles I keep close to heart.

1. The person who writes a tax cheque is rarely the person who ultimately pays the tax. The Financial Times pays the vast majority of my income tax by withholding it from my salary, but income tax is levied on me, not the FT. The same is true for national insurance, whether it is the bit formally levied on the FT on my behalf or the bit formally levied on me. As economists would say: “the formal incidence of a tax is not the same as its effective incidence”. Here is one such economist, Ray Barrell from the National Institute for Economic and Social Research, writing a note to one of my colleagues.

The suggestion that a rise in NICs is a tax on jobs is not economically coherent, although it might look plausible.  The incidence of a tax on wages does not influence its effects. Both are a direct tax on wages, but are collected differently, and have limited or no direct effects on employment. … It is the sort of thing we do in first year undergraduate courses.

For more information on tax incidence and why national insurance cannot be described as a tax on jobs Read more