The unjustified under-taxation of the self-employed

The self-employed are undertaxed relative to employees. That's a simple statement of fact.

But let's first be clear what this doesn't mean. That doesn't imply that people who work for themselves are any less virtuous than people who work for firms. It doesn't belittle the economic contribution of these five million or so British workers. Nor does the statement contain any judgement about the rate of tax that employees pay, whether it's too high or too low.

Yet that statement of fact - that the self-employed are currently privileged in the tax system with the gap adding up to around £ 5bn of foregone revenues a year - is evidently a hard message for many people to digest. Impossible even.

The Treasury's low-key cancellation of a planned bit of national insurance tax relief for this group of workers last week was loudly condemned by the Federation of Small Businesses and bewailed by the TaxPayers' Allowance even though, had the move gone ahead, it would have increased the overall tax gap between the self-employed and the employed still further.

"The Tory party is meant to be the party of low taxation and the friend of the ambitious. This U-turn fails on both counts," sniffed the Tory backbencher Jacob Rees-Mogg. Are we to infer from this statement that company employees, all 27 million of us, who do not benefit from this lower rate of tax, are to be considered unambitious? The consequence of the tax gap is that employers have a major incentive to hire people as temporary contractors rather than taking them on full-time, even when they're effectively doing the same job. Plenty of people who are self-employed today, particularly in the gig economy, would prefer to be employed.

Yet even Labour's shadow chancellor John McDonnell, who has frequently bemoaned the casualisation of the British workforce in recent years, called the Treasury's reversal a "betrayal of the self-employed".

Another consequence of the tax gap for the self-employed is that, as more people are employed in this way, total tax revenues from employment dwindle. This is something the Office for Budget Responsibility has highlighted as a threat to the public finances.

If less tax comes from the self-employed, there's a strong likelihood that, with public services clearly in need of a funding boost, ministers will end up increasing the income-tax burden on the employed. In this sense, one might say that the Treasury's originally planned tax cut for the self-employed would have been a betrayal of the employed. Some don't seek to deny that the self-employed are undertaxed, but argue that this is necessary to encourage people to become entrepreneurs, or to compensate the self-employed for the fact that they don't get paid holidays or company pension contributions. But leaving aside the pretty dubious economics inherent in these claims, trying to accomplish these kind of goals through a distorting tax gap is a terrible way to do it.

What we have here is an example of the dysfunction of our political system when it comes to tax.

Newspapers don't understand the subject, or choose not to understand it. They create a stupid slogan such as "White Van Man tax" in response to an attempt to close the gap. Cynical politicians - from both main parties - pander to the slogan, even when it undermines their broader agenda.

Ministers panic. Broadly sensible attempts at reform put forward by civil servants are hastily reversed, as happened last year. Then there's a furtive attempt to undo some of the damage of the reversal, which is in danger of making matters worse because it is not part of a comprehensive and coherent reform of the whole cripplingly-complex system.

The traditional liberal faith is that good arguments and good information will have a tendency to drive out the bad varieties. It's a faith that is being brutally tested. The Institute for Fiscal Studies has carefully explained the issue of the £ 5bn-a-year self-employed-employed tax gap and its adverse consequences clearly and frequently in recent years. Its director, Paul Johnson, did so again on the BBC's Today programme on Friday.

The government-commissioned Taylor Review of modern working practices last year argued unambiguously that "treating different forms of employment more equally in the tax system would be fairer, more economically efficient and support better quality work".

Perhaps one glorious day the message will finally penetrate. But for now we're forced to contemplate a miserable vista of wilfully ignorant news organisations, ideologically obsessive pressure groups and political opportunists shoring up a tax status quo that hurts the people that this same crew purport to be trying to help.

Why do the wealthy and well-connected tend to win so many political battles? Because they are wheels that squeak

The squeaky wheel gets the grease and losers cry louder than winners sing. British politics certainly bears out the truth of those old observations.

Just two months ago we witnessed a backlash against Philip Hammond's hike in national insurance for the self-employed, which was designed to bring the levy closer into line with the tax paid by employees. This resulted in a spectacular and humiliating U-turn for the Chancellor within days.

That fiasco came hot on the heels of a noisy revolt against business rates reevaluations and a partial retreat in the Budget (a retreat which is set to cost taxpayers £435m). That affair was also a reminder that, for a quarter of a century, cowardly governments (of all stripes) have dodged a revaluation of council tax bands in England out of fear of an eruption of opposition from the Home Counties.

Then, just last week, there was a coordinated push back from Tory MPs against a new funding formula unveiled by the Government last year for the distribution of central funding for local schools. One does not have to be Mystic Meg to foresee where this one ends.

All the reforms above have two things in common. First, they would make for a more equitable raising and distribution of resources. Second, they would create more winners than losers around the country. But the losers shout louder than the winners. And the losers, in the main, are satisfied: the squeaky wheel is lubricated.

In all cases, ministerial foolishness or cowardice made reform harder. Severe cuts to real terms per pupil school funding over the coming years accentuates the pain of the transition to the new formula for individual schools. The business rates revaluation was delayed for nakedly political reasons, making the eventual re-rating more painful (for a minority of firms) when it eventually came. The same applies, albeit on a grander scale, in the council tax saga. Hammond's national insurance reform probably ought to have been done in tandem with a wider set of reforms to address the conditions of self-employed workers.

Yet there's a larger dysfunction here. Even without those ministerial missteps there would have been significant, possibly insurmountable, opposition. Why? Why do reforms that would benefit more people than the numbers who lose out get shot down, watered down or never even attempted? 

Media framing is a major part of the problem. Newspapers run lobbying campaigns championing those who stand to lose out from a particular reform. They never run campaigns on behalf of those who stand to benefit. The broadcasters tend to take their lead from the press. And the resulting media cacophony persuades ministers to retreat.

Yet the media is not the only factor. Lazy MPs must be culpable too. In all these cases - school funding, self-employment tax, business rates, council tax - parliamentarians ought to be defending or pushing for reforms that would benefit the vast majority of the own constituents.

Where are the MPs from all those areas that will benefit speaking out on behalf of the more equitable school funding formula? Where are the political representatives from less well-off regions pushing for the original business rates revaluation? Where are the MPs, with their tens of thousands of conventionally employed constituents, defending the national insurance equalisation with the self-employed? Why are parliamentarians not lobbying for council tax revaluations, given the fact that, arithmetically, most of their constituents would benefit? 

Economics is often unhelpfully and inaccurately framed as a zero sum game, where one person's gain is another person's loss. Think of how Donald Trump talks about trade, or the way Ukip and now the Conservatives talk about immigration. But when it comes to reforming an unequal tax or spending system the zero sum logic actually holds. And the person who gains tends not to be the poor but the wealthier, the more powerful and the better connected.

The pessimistic view is that because potential winners are usually dispersed and disorganised, and because people generally bank gains without gratitude, the incentives of politicians will always be to listen to the angry and organised losers. Perhaps that's true. But it would be nice to put it to the test rather more often.

The first step is for the silent wheels to start squeaking too.