A hypothecated tax is not the way to save the NHS

This morning the Guardian has a piece with the headline “Income tax must rise 3p to stop NHS ‘staggering from year to year’. I would say it probably does stagger from year to year, because every damned year we only have 24 hours to save the thing.

Lord Kerslake says that big questions will have to be asked about whether or not the public is prepared to actually pay for a service equivalent to our European neighbours, who spend much more. This is true, we get what we pay for when it comes to the NHS and the outcomes aren’t actually very good.

But what Kerslake proposes is not a very good thing at all. A hypothecated tax is a tax where the funds raised are only spent on the nominated service, much like the belief that National Insurance is going on paying into a future pension pot. This isn’t true, it goes into the general pot and is spent with no real link to what the money was raised for.

This doesn’t sound very good, which is why so many US states raise revenues by targeting specific behaviours, goods and services (Alabama raises 84% of it’s revenue this way). Say I am a politician, and I want to desperately save just one child’s life. I don’t want to propose raising general taxes, because this is very unpopular. Instead I say “look at that miscreant over there smoking. I will set a special tax on smoking, and the revenue will only go to roads so that ambulances can get little Jimmy to hospital quicker”. This sounds very good politically, but when we raise taxes in one area we tend to find revenue is reduced elsewhere.

Outside of a hypothecated tax of a moment, but still looking at the top rate of income tax, when it was raised in 2010 rather cynically by the outgoing Labour government, tax revenues fell. When the rate was lowered to 45p from 50p, there was much howling and knitting of teeth, but the bankersthebonuses ended up paying much more.

If we have a hypothecated tax, and raise income taxes (across the board mind, not just on the higher rate) we may well end up with a lovely large figure. But tax revenues elsewhere may well have fallen, and because this is a hypothecated tax we cannot spend the new revenues on the shortfalls in government spending. We may well want to look at how the national religion NHS is funded, but it certainly shouldn’t be through a hypothecated tax.



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