As I say in the Mail on Sunday, the thinking behind it is that if people were more aware of how much tax they really paid, they’d be more inclined to vote for low-tax parties. At the moment, National Insurance is one of the taxes people are least aware of as it is simply deducted from their pay cheque. It is no coincidence that the most unpopular taxes—council tax, inheritance tax—are the ones that voters are most aware of paying. Equally, if income tax and National Insurance were merged, Labour wouldn’t be able to use increasing National Insurance contributions as a politically cost-free way of raising money to spend on the NHS.
One thing that Tory candidates—both successful and unsuccessful—were shocked by at the last election is how many voters who were net contributors to the state, thought they would benefit from ever higher public spending. The Tory leadership’s own post-mortem into their failure to win a majority, also discovered that this had been a major obstacle to them breaking through. Flagging up to the electorate, that the basic rate of tax is 31p not 20p would be a big step to changing how people view their relationship with the state and whether or not they believe they would be better off with public spending increases or tax cuts.
Merging income tax and national insurance would also make life a lot simpler for companies, especially small ones that don’t have big payroll departments. As always with Osborne, this move would be a matter of political economy.