Could Health And Social Services Be Safeguarded By A New Approach To Tax?

Sure, not everyone would be happy about paying an NHS tax, but it would quickly flush out how much of a priority the NHS is
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Challenging situations often yield fresh thinking. So the current winter pressures on the NHS have flushed out some different takes on how to bolster funding.

A panel of health experts has joined members of the Health Select Committee in calling on the Government to look at a ’hypothecated tax”, ring fenced for the NHS. Committee chair Sarah Wollaston committee suggested recently that it could even be paid for by the over 40s.

Hypothecation is essentially about earmarking tax revenues for a particular end. Currently pretty much all tax revenues go into one big consolidated pot, which governments draw on for funding.

It’s not a new concept - you could describe the BBC licence fee as a hypothecated tax of sorts. When National Insurance was introduced after the war it was hypothecated to fund the NHS and retirement, but really it’s a tax in all but name with contributions going into the main pot.

There have been a number of points over recent decades when policy makers and commentators have called for more hypothecated taxation. But it’s never got a huge amount of traction, for a whole host of reasons.

For a start, by ring-fencing revenue, governments are locking down what they can spend. What if circumstances and priorities change? Moreover, once you start hypothecating particular taxes, where do you stop? Perhaps education should have its own fund, or defence. And then there’s a risk of people demanding a ‘pick n’ mix’ approach to which taxes they pay.

Hypothecation would undoubtedly complicate an already complex tax system, and this in turn brings an economic cost, as well as an administrative one.

Then there are issues around how the actual hypothecated tax would work. In a number of countries social insurance is effectively a hypothecated tax to fund certain benefits such as healthcare and pensions, but there are lots of differences between how these taxes work in practice. In France, there is a very specific breakdown of social security with very clear delineation of funding of the different elements (pension, unemployment insurance etc) and a real change in the benefits you receive as a result. In India you build up a fund that is much more similar to what we would see in a private pension fund, albeit operated by the government.

So will the latest calls for an NHS tax soon be put to bed?

I think this time the debate has merit. Despite the drawbacks, there is an overriding reason why hypothecation needs serious consideration - it increases transparency and arguably trust.

Our research suggests people want to know how their tax is spent, and when they do, they mind paying it less. Sure, not everyone would be happy about paying an NHS tax, but it would quickly flush out how much of a priority the NHS is for politicians and voters - forcing them to put their money where their mouth is.

There’s never been a more important time to reconnect people to the purpose of tax. Brexit demands a rethink of a number of our taxes. Combined with developments such as robotics and the rise of self employment, there’s an increasingly pressing need to reboot the tax system.

Given tax changes are fraught with difficulty, we only have a chance if people accept it has to be done and engage on the options. A debate on hypothecation could kickstart this wider and hugely important review.


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