Abolishing National Insurance would be a tremendous gamble

 

Robert Henderson

George Osborne is thinking about abolishing National Insurance (NI)  as a separate tax and incorporating it into income tax.  The implications of such a move would be very  far reaching    because  the basic  NI  rules are complex  and effect far more than just NI deductions and the practical IT  difficulties it would create for both the government and employers, both public and private, are immense.

The most obvious and pressing reason why the idea should not go ahead is the fact that NI is one of the big earners for government. In the 2014/15 financial year it brought in £108 billion – see page 15.  Only  VAT  (£113.9 billion) and income tax (£163 billion) provided more tax revenue to the Treasury. To make up for the loss of the NI contributions income tax would have to be increased  massively if  income tax has to raise the £108 billion currently raised by NI  in addition to the £163 billion it currently collects.  That could only be achieved  by getting most of the extra money by  raising the basic rate (currently 20%)  massively, probably doubling  it,  because those paying the  40% and 45% income tax rate are not sufficient in number  to be able to bear the brunt of the increase. Moreover, once tax rates go beyond 50%  they become psychologically  difficult and increase the likelihood of evasion. In addition, the present government is deeply unsympathetic  to raising the higher income tax rates. The situation is further complicated by the government’s stated intention to keep on raising the personal allowance which at least in the short term is likely to reduce the income tax take.

The options  for raising some of the £108 billion by raising other taxes are limited.  VAT could be raised,  but that would be regressive because it  falls on everyone and would almost certainly suppress demand.  The next  two most productive sources of tax revenue in 2014/15 were  corporation tax  (£41.4 billion) and excise duties (£47.2 billion).  The fact that both  bring in so  small an amount in relation to what needs  to be raised means neither could  supply more than a small part of the lost  £108 billion even if their rates were raised substantially.  Moreover, raising corporation tax would go directly against Tory policy of having a low tax burden on business and increased excise duties would again be regressive.

The next  obstacle is the incompatibility of  the income tax and NI systems.    NI operates on a radically  different basis to income tax. Income tax is simple in principle, the complications which arise come not from  calculating the tax due but in deciding what is liable to income tax. There is the personal tax  allowance which exempts a certain amount of earnings  from tax and   three rates of tax (20%,40%,45%)  for three bands of earnings. The operation of NI is much more complex, involving  both employees and employers,  with a  link to benefit entitlements  and  NI rates which do the exact opposite to income tax rates, namely, the NI rate decreases as income  rises.

The NI system is too complex to give exhaustive detail here  but I shall outline  a few of the basic  NI facts to give a flavour of its complexity.  Currently NI  is not paid by anyone earning less than  £155 per week, although someone earning £112 per week  (the Lower Earnings Limit)  gets credit for benefits such as the state pension as if they were paying NI.  Those earning  £155 per week (the Primary Threshold) begin paying NI. When they reach £156 per week (the Secondary Threshold) the employer also begins paying NI.   This employer’s contribution is in addition to the employees and is a payroll tax.  When  the employee earns £815 per week (the upper earnings limit) or above they pay a reduced rate of NI.

People who are employees  pay 12% of their pay between £155 and £814 per week and 2% on their pay above £814 per week.  The employer will pay 13.8% on all earnings above £156 per week.   Benefits in kind, for example use of company car, attract  employers  but not employees’ NI at the rate of 13.8%.  This is a big saving  to an employee  enjoying substantial benefits in kind. There are separate rules for the self-employed which the government has pledged to alter during the course of this Parliament.   As can be seen the NI situation is very administratively messy.

If income tax  and NI are amalgamated a problem arises with pensioners over the state retirement age.    NI is not paid by those over retirement age, but income tax is. Hence, if NI is abolished and income tax is raised to compensate for  the ta x revenue  loss, many pensioners would be left paying far more tax unless the government exempted all or part of their income. But to do that would be incredibly messy, not least because large numbers of pensioners pay income tax.  It is also worth noting that more and more pensioners are working past retirement age.  If the income tax rise to compensate for the loss of NI revenue means a rate of income tax which makes those over the retirement age more expensive to employ, this will probably mean fewer OAPs working or having less income, either of which would create greater eligibility of benefits.

The payment of benefits generally would also create difficulty. At present NI contributions count towards  entitlement for:

Basic State Pension

Additional State Pension

New State Pension

Contribution-based Jobseeker’s Allowance

Contribution-based Employment and Support Allowance

Maternity Allowance

Bereavement benefits

The position with the new  state pension is complicated because , contrary to government suggestions that it would provide everyone with an enhanced pension,  this appears not to be true  with perhaps two thirds of pensioners not receiving the full pension.

Any consolidated system for tax and NI would have to either take into account the entitlement to benefits or the benefits would have to cease to have any connection with what the individual pays in  tax.  There would also be the complication of how to treat the entitlements built up prior to the abolition of NI.   The present  system of National Insurance numbers would have to be retained because they are tied in so firmly to the access to the British welfare state.

Creating an entirely new computer system  to accommodate both the new amalgamated regime  and the present stand-alone system  for income tax and NI  would be daunting at best and probably impossible. ( In this context it is  worth bearing in mind the lamentable record of British governments of all colours with massive computer systems.) It is likely  that both the old and new  Government computer programs would need to keep running.

Then there is the IT problems  and additional costs which would be faced by employers, the vast majority of which, together with  many of the self-employed,  use computerised accounting and payroll systems. All of those would have to be  updated or new systems bought, installed and staff instructed how to use them.  Many current systems would not be updated because they are either too old or the software company which created them has gone out of business. Public service employers are particularly vulnerable as they often  use bespoke systems, that is systems developed for them alone,  which are often very old in origin with many updates patched into them over the years.

Finally, there is the problem of ensuring that the additional income tax revenue is actually collected. There is also  a very real general  danger that a switch to a consolidated income tax/NI tax would not  produce the same revenue even if the Treasury calculates that  it would on paper.  The Treasury might simply get their sums horribly wrong because of the complexity of the integration they are managing.  Alternatively, smart   accountants may simply find ways of minimising any additional  income tax.  The beauty of NI from a tax collection point of view is that it allows much less  tax evading wriggle room compared with income tax.

National insurance is a far from perfect system, but it is difficult to see how it is radically unfair or its operation radically administratively inefficient. Its purpose is a sham in as much as there is no managed  fund created to pay for specific services and benefits,  and the link between NI and earned benefits is increasingly tenuous. But so what?  It is a major revenue source which regardless of the fact that it goes into the general Treasury pot is major part of the funding source of the Welfare State. Moreover, any government could decide to make  NI an hypothecated tax allocated to particular circumstances.

As for being administratively simpler, this  seems wildly improbable  when our past experience of large scale  government  IT systems is of consistent failure and  there will be undeniable extra costs for employers.

At best the abolition of NI  would be a tremendous gamble and at worst unreservedly reckless. Government  policy should never be about gambling.

Greece and the Eurozone : holding tight to nurse for fear of something worse

Robert Henderson

The   Greek referendum on the terms for a further  financial bailout was potentially  a clever move by  Alexis Tsipras and Syriza. If the result of the referendum   had been  YES to the terms put forward to deal with the Greek debt , Tsipras and his government were off the hook for reneging on their election promises. If there was  a NO to the conditions, Tsipras could  play the democracy card and challenge the Eurozone to go against the democratic will of the Greek people or simply walk away from the mess and  pass the poisoned chalice to his political opponents.

Having asked for a rejection of  the terms offered  by the Eurozone in the referendum and  got an emphatic  61% vote  for rejection,  Syriza   could  have  called the Euro elite’s bluff from a position of strength.   Regrettably for Greece’s hope of recovery they have not had the courage to do so.  Instead  they have  humiliatingly capitulated by signing up to an even more severe  austerity deal than  they could have concluded with the movers and shakers  in the Eurozone a fortnight ago. The stark realpolitik of the situation was epitomised by the Greek prime minister  Alexis Tsipras appealing to the Greek Parliament to accept the deal with the words   “We don’t believe in it, but we are forced to adopt it,” The Parliament  accepted by  his plea by voting 229 for and 64 against, but it required support from the opposition because over 30 Syriza MPs either voted against or abstained. From provisional acceptance by the Greek government  to acceptance by Parliament took three days.   Shotgun marriages often take longer to arrange.

Greece is no longer in control of its economy or its political system.  It is having forced upon it huge changes to pensions and public sector salaries, large privatisations,  and perhaps most humiliating, to sell off €50bn of Greek assets , the proceeds of which will be partially used to guarantee repayments on debts owed to the EU and the IMF. The detailed new requirements are:

“To unlock a fresh €82bn to €86bn bail-out, Greece has until Wednesday to pass laws that:

• implement VAT hikes
• cut pensions
• take steps to ensure the independence of Greece’s statistics office is maintained
• put measures in place to automatically slash spending if Greece fails to meet its targets on primary surpluses (revenue minus expenditure excluding debt servicing costs)

It has until July 22 (an extra week compared with a draft statement) to:

• overhaul its civil justice system
• implement the Bank Recovery and Resolution Directive (BRRD) to bring bank resolution laws in line with the rest of the EU

Greek MPs will also have to stomach a move to sell off €50bn of Greek assets.”

This is not the end of the matter. At best the Greek problem and the problems of the Eurozone generally have been simply been kicked down the road. The madness  at the heart of this settlement is that Greece is being further burdened  by a huge amount of extra  debt when the general consensus amongst economists is that the existing  debt was more than Greece could ever hope to repay.  Disobligingly for the Europhile elite,  the IMF  has made it clear since the agreement between Syriza and the Eurozone  that Greece requires a great deal of debt relief and that unless this is forthcoming  the IMF will not take part in the overseeing of the agreement.    But the agreement makes no provision for overt debt relief, although fiddling with the period of repayment and interest rates payable may reduce the real value overall debt (principal and interest)  somewhat.  Nor is this position likely to change, because some Eurozone countries, most notably Germany,  are determined to continue to resist overt  debt relief if Greece is to continue within the Eurozone.  At the same time Germany have made it clear that they want the  IMF involved in the realisation of the agreement. In addition to these obstacles all the other Eurozone countries have got to sign up to the agreement  and this will require some countries, including Germany,  to get parliamentary approval to the terms.  Germany’s finance minister Wolfgang Schäuble has even suggested that Greece leave the Euro for five years.

But even if the Eurozone votes collectively to accept the deal and the IMF  difficulty is overcome,  there is no guarantee it will be realised  for two reasons. The Greek people may be driven by  desperation to  resort to serious violence after they realise that voting changes nothing in Greece and the severe austerity programme takes effect , effects which are aggravated by the fact that   Greece has no real Welfare State.  This could drive the Greek political class to hold further elections with the result that a government is elected which will not implement the deal.

More mundanely,    Greece’s  politics and  public services are severely tainted by cronyism and corruption.  The country  may simply  lack the bureaucratic  structures and expertise to  implement the  complicated and far reaching reforms  which are being sought by the Eurozone.

The sad  truth is that Greece is a second world country which has been masquerading as a first world country.  Before joining the Euro it got by because it had its own currency and  received very large dollops of money from the richer members of the EU.  In those  circumstances its lending was circumscribed by the fact that its debt attracted a high rate of interest because it was seen as a bad risk.  Once Greece had smuggled itself into the Euro by falsifying its accounts,   it was treated as safe a bet as Germany  for creditors who rashly  reasoned that the rest of the Eurozone would ensure Greece did not default.

How difficult would it to be for Greece to re-establish the Drachma? The Czechoslovakian split into the Czech Republic and Slovakia in 1993 provides a reassuring  example of how it might be done.  Initially the two new countries were going to share a currency but within a matter of weeks they came to the conclusion that this was unworkable and decided that each country should launch its own currency. This was accomplished with very little trouble:

 The two countries already had capital controls, but all cross-border money transfers between them were halted to avoid further speculative flows into the Czech Republic. Border controls were tightened.

Komercni Banka, a then state-owned commercial bank, glued stamps, printed by a British firm to ensure secrecy, on 150 million federal banknotes. These were trucked around the country with the help of police and the army.

The exchange for notes stamped by Czech or Slovak stamps, at a 1:1 rate, started on February 8 and was completed in four days. Later in 1993, the stamped notes were replaced by new ones.

People could swap a maximum of 4,000 crowns — then worth $136 (87 pounds) — in cash. They had to deposit the rest. The old money ceased to be valid immediately the switch started.

The whole process, which required 40,000 people just on the Czech side, went ahead smoothly. An opinion poll showed 86 percent of Czechs experienced no problems in the operation. Capital controls were essential to stop bank runs. Secrecy in the buildup was paramount.

The Greek situation is not an exact parallel with that of Czechoslovakia because of the massive debt the country has acquired. Nonetheless, if Greece did relaunch the Drachma creditors would be forced to decide  between accepting  the new currency even though this would certainly mean them receiving far less than the face value of the loans  or in all probability getting nothing.

Would Greece out of the Eurozone be a better bet for Greeks than what is on offer within the Eurozone?  It is difficult to see how things could be worse because , as things stand, Greece is locked into many years of austerity at the least. . Most importantly outside the Eurozone  the Greeks could take charge their own destiny. Most importantly they would be able to control how much of and at what rate they would repay their national debt .  Holding tight to nurse for fear of something worse is not the answer here because long experience shows the something worse will always be the EU.

Film review – Ex Machina

Main cast

Domhnall Gleeson as Caleb

Alicia Vikander as Ava

Oscar Isaac as Nathan

Sonoya  Mizuno as Kyoko

Directed by Alex Garland

This is yet another film exploring the potential of digital technology to radically change our lives. The  subject  here is the relationship between advanced humanoid robots and humans, but with a twist, namely,  can sexual attraction arise between a human and a robot and can that attraction move on to something resembling deep emotional attachment?

The basic  plot is simple. A young  computer coder, Caleb (Domhnall Gleeson) thinks he has won a competition at his workplace, the prize being  a week  on an isolated  research station with Nathan (Oscar Isaac), the boss of  the company for whom Caleb works.   In fact, there is no competition and he has been chosen simply as an experimental subject.

When Caleb reaches the research station he finds it occupied  by  Nathan and what he thinks is a female  Asian servant  Kyoto.   There are no other people on the research station. In fact there are only two humans for Kyoto is a robot.

Nathan asks  Caleb to  perform a Turing test. The classical version of  the test  consists of a human interacting with an artificial intelligence (AI) without knowing whether they are dealing with an AI or another human being.  The test is passed if  the human is convinced the AI is human. But this is a Turing test  with a twist.   Caleb knows what he is dealing with, a humanoid robot called  Ava (Alicia Vikander).

Caleb’s ostensible task is to see whether Ava convinces as a human interlocutor, despite the fact that he knows she is a machine.    But his real function is to see how readily  a human being will accept a machine that he or she  knows to be a machine  as a quasi-human being, or at least an intelligence which a human can relate to  as they would relate to another human being.

To make matters more complicated  Ava is physically  portrayed  as  a machine.   She , for want of a better word, is humanoid, but her  non-human   status is made only too visible with every part of her but  the  face, hands and feet  being   rather obviously  those  of a robot rather than a human,  for example, by having some of her machine components nakedly exposed.   As a further barrier to emotional involvement  there is no physical contact between Caleb and Ava because  a transparent screen separates  them.

As the film progresses Ava becomes more and more human to Caleb not only because of the developing relationship between the two f, but in the  way Ava  presents herself physically. She puts a wig over her skull and wears a dress which obscures her machine structure.  With these accoutrements she resembles an attractive woman.

That Caleb should develop  an emotional relationship with Ava is extremely plausible. Just think of the emotional investment that people make in their pets. Reflect on the habit  humans often  have of adorning inanimate objects with some of the qualities of they respond to in humans and animals or on their  sentimental attachment to objects which are associated with those they care about or of events which are important to them.  Humans have a strong innate desire to form  relationships with the external world.   That they might form  deep emotional relationships  with intelligent machines is utterly believable.  (The recent film Her which featured a highly intelligent operating system forming a relationship its male owner covers exactly this ground.)

Caleb learns  more and more about what is going on. He discovers  that Kyoto is a robot and  sees  unanimated bodies of earlier model robots. He finds out that he did not win a competition but was chosen by  Nathan not for his IT skills but for his personality and personal  circumstances, for example, Caleb  is heterosexual and   single (which makes him vulnerable to female attention). Nathan  has also used  developed Ava to appeal to Caleb by basing  Ava’s general physical appearance on Caleb’s  Internet  pornography searches to make her attractive to Caleb.

Caleb is fascinated by Nathan’s AI techniques but disturbed the way he  is being manipulated. After he has already become seriously  emotionally involved with Ava, he  is naturally upset when Nathan tells him that if Ava fails the Turing test  she will  be updated  with her memory wiped. This  will destroy her as the  personality he knows, in fact, be the AI equivalent of death.  Consequently,   Caleb plots with Ava for the pair of them to escape .  In fact, this is the  real  Turing test which Nathan has devised, namely to see if Ava can be convincingly human enough to trick Caleb into helping her escape, an escape Nathan smugly but wrongly believes is impossible.

Ava makes choices for herself in a way which is both human and inhuman. Her final actions at the research centre would be seen as  psychopathic  in a human because she single-mindedly seeks  her ends without regard to what she has to do to attain them. Ava  has  manipulated Caleb without any emotional  investment on her part.  But at the same time she has  a fundamental  component of consciousness, namely, her  own  desired ends  which go beyond mere mechanical programming. Ava wants to escape to satisfy her curiosity as well as to retain her existence as Ava.  She is not a quasi-human but something new, neither insensate machine nor  organic life.

The film ends with Ava showing what a difference there is between a machine intelligence and a human one. Caleb does not escape nor Nathan live to see the end of his experiment. Only Ava  leaves the research station and leaves it without any sense of loss or shame at her betrayal of Caleb.  But because the character is a robot her behaviour does not seem heinous as it would do in a human. It merely seems as innocent of blame as a predatory animal killing its prey.

The performances of  Gleeson, Isaacs and Vikander are all strong, not least because the film is very well cast. . Gleeson has an  appropriately  shambling geekiness  and clumsiness in his relationship with other people and   Isaac is a  dominant brooding psychopathic  presence.   But the real star  is Vikander . She  is weirdly convincing as a being who is at least half the way to being human.   Her realisation of the role  makes the robot flicker in and out of her performance. Vikander, a professional dancer, gives Ava a fluid grace of moment which does not seem quite natural; she speaks in a pleasantly modulated and controlled way but with little variation of emotion; her face is not expressionless but there is a very  restricted range of expression. The overall effect is of an  ethereal other-worldly being. The film is worth seeing for her performance alone.