Lloyd George introduced it. Labour made it the bedrock of its post-war state pension scheme. Nigel Lawson toyed with the idea of abolishing it only to go cool on the idea. What is it? It is national insurance, the little brother to income tax and now the subject of a new review commissioned by George Osborne.

National insurance contributions are the ultimate stealth tax. They raise a lot of money for the exchequer while being far less politically charged. Osborne expects to net £115bn from NICs in the current financial year, almost the same as from VAT and around two-thirds of what he will get from income tax (£170bn).

But whereas no chancellor since Denis Healey in the 1970s has dared raise the basic rate of income tax, when Gordon Brown wanted to raise serious amounts of cash in order to fund higher health spending in 2002 it was to NICs that he turned.

There was a reason for this: NICs are less visible and can be raised without nearly so much political grief. The public believes that NICs are somehow ring-fenced, that the money paid by employees and employers goes into a fund that pays for the NHS and for pensions. This, though, has not been the case for a very long time.

As the review of the tax system conducted by the nobel prize winner Sir James Mirrlees noted: “National Insurance is not a true social insurance scheme; it is just another tax on earnings, and the current scheme invites politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income. The two systems need to be merged.”

Let’s be clear. Osborne is not proposing the immediate merging of NICs and income tax. Instead, he has asked the Office of Tax Simplification (OTS), to see whether the two could remain separate but be better aligned. This is undoubtedly a more cautious approach to reform, but in the long term it could reach the same conclusion: full merger. Despite the considerable difficulties involved, this would be welcome.

It is not hard to see why the chancellor is adopting a softly-softly approach. Income tax is based on yearly earnings, NICs on weekly earnings. Pensioners do not pay NICs, and nor do the under 16s. They are collected using separate computer systems, and the recent problems with government IT projects does not exactly inspire confidence that the two could be merged with ease.

There are also concerns, especially on the left, that merging tax and NICs would mean the link between contributions and benefits would be severed once and for all. Once people no longer thought they were personally benefitting from the contributions they had made over the years, it would - so the argument goes - make it easier for a tax-cutting party to shrink the size of the state.

Finally, there would be losers as well as winners from any change, and the likeliest losers would be pensioners, who also happen to be the segment of the population most likely to vote. All these are important concerns.

It is also not hard to see why Osborne wants the OTS to have another look at this issue. Businesses, particularly small businesses, find the tax system complex and expensive to administer. They would make considerable savings from a single earnings tax and that would translate into higher profits and more jobs. John Whiting, director of the OTS says that his organisation’s polls of business have highlighted concerns about the complexity of the system.

What’s more, Osborne’s political narrative for this parliament is that the Conservatives are the party of working people. The rise in the minimum wage (the so-called ‘national living wage’) and the increase in the personal allowance in the budget were designed to drive home this point.

The impact of these changes was blunted by the decision to make tax credits less generous, a move that will take money away from the working families the chancellor says he wants to support. But a decision to merge tax and NICs would provide a fresh opportunity to drive home his political point.

A full merger of income tax and national insurance would involve raising the threshold at which employees start paying NICs (currently £8,060 a year for someone who works full time for a year) to the personal income tax allowance (currently £10,600). This would mean those on low incomes paying less tax and getting the full benefit of Osborne’s plan to raise the personal allowance to £12,500 by the end of the parliament.

The gap between the starting point for paying NICs and paying income tax has widened in recent years, because Osborne has used his budgets to deliver above-inflation increases in the personal allowance. Assuming that the chancellor wanted to make merger revenue neutral, the main beneficiaries would be younger workers on lower incomes, who would gain at the expense of older, better paid workers and pensioners. This would help redress some of the inter-generational imbalance in the tax and benefits system.

Change would probably happen in three distinct stages. In the first stage, Whiting will look at ways of better aligning income tax and national insurance. That means seeing whether it is possible for NICs and income tax to be levied over the same time period and on the same things, perhaps exempting pensioner incomes.

In the second stage, the chancellor would start to make the two indistinguishable by having the same starting point for paying NICs and income tax. The final stage would involve a single earnings tax that would amalgamate income tax and national insurance based on (at present) tax bands of 20%, 40% and 45%.

Sure, there are obvious drawbacks, of which the most obvious is the likely backlash from pensioners. You can imagine Treasury officials telling the chancellor, in best Yes Minister fashion, that he is being awfully “courageous” in risking so many votes. But as the Institute for Fiscal Studies has noted, the barriers do not seem insurmountable. There could be an enhanced personal allowance for pensioners or the state pension could be exempted from income tax altogether. Entitlements could be linked to years of residency or citizenship.

Osborne’s predecessors concluded that reform is more trouble than it is worth and he may well do the same. The chancellor has so far done little to make the tax system less complex; he has been a tinkerer rather than a reformer. It would be a real coup if he was to be able to achieve what Lawson, who was a genuine tax reformer, failed to do in the 1980s.

If Osborne does get cold feet, Labour - struggling as it is to make any impact with voters - should seize the opportunity. Done properly, merger of tax and national insurance would increase employment while making the system simpler, fairer and more transparent. It is long overdue.