Progress | Centre-left Labour politics

Tax talk

Is an earmarked health tax the way to save the NHS, asks Michael Jacobs

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The Chancellor’s Pre-Budget Report in November marked a dramatic shift in the government’s rhetoric about taxation. Both Gordon Brown and Tony Blair are now saying openly that tax increases may be necessary over the next few years if the National Health Service is to be properly funded. It is unsurprising then that the idea of ‘earmarked’ or ‘hypothecated’ taxes is now being widely discussed. Though Brown has said he is against, Alan Milburn, Charles Clarke, Neil Kinnock and Frank Dobson have all recently come out in favour. Number 10 says it wants all options on the table. 

The idea of earmarking a specific tax for the NHS was put forward by the Fabian Society’s Commission on Taxation and Citizenship and laid out in Paying for Progress: A New Politics of Tax for Public Spending. The proposal is for income tax to be split into two. Half would become a health tax, funding all NHS spending. The other half would become general income tax, allocated as normal between other areas of government expenditure. The two taxes would be separately marked on payslips. Since tax revenues fluctuate with the economic cycle, while NHS spending should not, the revenues from the NHS tax would go into an ‘NHS Fund’ to smooth the path of spending. The tax rate would be set at a level sufficient to finance planned NHS spending over the economic cycle: in boom years the fund would build up a surplus, which could then be spent in leaner times.

The main argument in favour of an earmarked NHS tax is that it would increase the transparency of the tax system, ‘connecting’ taxpayers better to the taxes they pay and the public services they get for them. In turn, advocates argue, this would make it easier to raise the health tax to pay for higher health spending. The Fabian Commission found that the number of people willing to pay an extra 1p on the basic rate of income tax doubled (from 40 percent to 80 percent) if it was specified that the money would be spent on the NHS. Earmarking, it seems, could solve the tax conundrum: by convincing people that the money was really going to the service they care about, it would make people willing to pay more.

But the Commission set out the objections to an earmarked NHS tax too. The public may be happy to pay more tax for the NHS. But they might then seek lower spending and taxation for ‘undeserving’, or otherwise unpopular, areas such as social security. Earmarking would reduce the Treasury’s flexibility to pool revenues from different sources. And the need to disconnect spending from receipts through the NHS Fund would make the tax not so transparent after all.

But the key arguments for a health tax arise from the nature of the funding problem for the NHS. Getting UK health spending up to the expected European average of 10.7 percent of GDP in 2005-6 will take another £30 billion in current terms each year – the equivalent of up to 10p on the basic rate of income tax. Even for the most optimistic supporters of higher taxes, this kind of increase seems implausible so long as the NHS is funded out of general taxation. If a tax-funded NHS is to be retained, therefore, the public will have to feel much more personal ownership of their health spending, in the way people do under continental social insurance schemes. A hypothecated tax, coupled with a clear Citizen’s Contract establishing the entitlements people have to NHS treatment, could generate such a sense of ‘personal health spending’, thereby enabling tax rates to rise in the same annual way as social insurance contributions do. Indeed, it could pave the way for the NHS to become a separately constituted, democratic and publicly owned body. In this way, its advocates argue, a hypothecated health tax should not simply be seen as a short-term political ruse. It may be a necessary component in the long-term sustainability of a tax-funded health service.

  • Paying for Progress: A New Politics of Tax for Public Spending is published by the Fabian Society ( Tel: 020 7227 4900).

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Michael Jacobs

is General Secretary of the Fabian Society

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