Sean O'Grady: Time to get real about our crazy taxation system

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The Independent Online

Our graphic of the UK's chaotic system of taxation illustrates precisely what is wrong with it – it is erratic, irrational and unfair.

The key thing to remember is that, despite its name, national insurance (NI) is simply another form of income tax, as is, in a way, the withdrawal of child tax credits and child benefit as earnings rise. Also included is the way tax thresholds and personal allowances kick in – especially when they're not uprated for inflation, as now.

Anyway, laid out in graphical form, our random tax rates resemble some piece of geometric art, or maybe the profile of Battersea power station. Less artful is the way that those earning, say £10,000 a year, pay about 70p in the pound in NI and tax on every extra pound they earn; yet someone on £150,000 pays only 52p on each extra £1.

While most of us know whether the top slice of our annual earnings is taxed at the rate of 20 per cent, 40 per cent or 50 per cent, few know that we pay a further 12 per cent or 2 per cent in NI, or nothing, on our weekly income.

It's all a product of political cowardice and historical accident. In the Edwardian dawn of the welfare state, national insurance contributions were just that – linked to entitlement and benefits (hence the old nickname "the stamp"). Now it just goes into a gigantic Treasury pot.

Every chancellor since Lloyd George has shied away from reform, for fear of us realising just how much the state takes; and they found it easier to stealthily raise NI than tax. In fact it was the Lib Dems alone who argued for a combination of tax and NI. Now it seems George Osborne may get the credit for another of their policies.

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