Help us push the Living Wage to stop the widening pay gap


8:45 am - May 17th 2011

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contribution by Matthew Butcher

Yesterday’s report by the High Pay Commission revealed that the top 0.1% of UK earners will see their pay rise from 5% to an estimated 14% of national income by 2030.

Worse, the ratio between executive pay and the national median income is set to rise to 214:1 by 2020. But not only do Britain’s biggest companies employ some of the richest people in the country but their workforce includes some of the poorest too.

The working poor, many of whom work for FTSE 100 companies, make up an unsettling proportion of the workforce in this country. Over 3.5 million people over 22 survive on less than £7 an hour, with the proportion amongst young workers being even higher. And inflation, currently at 4% is expected to rise.

Growing up in families with low paid parents has effects on children for the rest of their lives. Of the 2.8 million children in the UK living in poverty in 2008/9, a shocking 59% of them have one or both parents in work.

Children who grow up in poor households are, according to the Marmot Review, more likely to be affected by obesity, heart disease and mental health problems. Parents on low pay also end up having less time to spend with their kids.

A cleaner at Marks and Spencers, working for a contractor, described her shifts: “I work 7 days a week and like many other cleaners I have to get up at 3 o’clock in the morning to get to work from Leytonstone where I live. We can’t afford the tube and I spend 2 hours one way to get to work. My morning shift is only 4 hours.”

FairPensions and its union partners are calling on Britain’s biggest listed companies to take action on low pay by implementing a Living Wage for all of their on site staff.

A Living Wage is the minimum hourly wage required for housing, food and other basic needs for an individual and their family. Within London it is set each year by the Mayor’s office and is currently £8.30. A single rate for the rest of the country is currently £7.20 per hour. The National Minimum Wage is £5.93 per hour (rising to £6.08 in October).

But the public can now help us take action by demanding that Britain’s top earning executives pay their staff a Living Wage.

FairPensions’ first Living Wage action is pressuring finance companies to become Living Wage employers. Anyone who has a financial product with a FTSE 100 company can take action – and that probably includes you.

Take action at www.activateyourmoney.org

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Reader comments


1. Mike Killingworth

In other words, just as the story of the last thirty years has been that of the abolition of the skilled working class, that of the next thirty years is going to be that of the abolition of the salariat. And if we have an economic pyramid like that of 1860 – when at least there was a nascent labour movement – why shouldn’t the political system revert to oligarchy, too.

Democracy – an idea whose time has gone. If I were a thirty-something politics lecturer with my name to make, I’d be sorely tempted to write a book showing that democracy was never wanted by the masses, but was foisted on them by left-wing intellectuals with no practical understanding of how society worked.

2. Chaise Guevara

“Over 3.5 million people over 22 survive on less than £7 an hour”

Present! Although I’m ok financially, probably because I live somewhere cheap. Which leads me to suggest that, while this is a commendable idea, we need means assessment that’s more accurate than dividing your residence into “London” and “not London”.

Or perhaps it’s because I don’t have dependents? I notice your article says “for an individual and their family”. I cannot put my hand on my heart and say I need to earn £7.20 an hour to survive in good health, but I imagine a single parent working in Surrey would need a good deal more than that. So: good idea, but suggest more detailed assessment of local living expenses, and supplementing the wage with child benefit.

You’ve got my support. At http://www.appointmetotheboard.com, we’re campaigning for a fairer economy – that means a curb on executive excess and a Living Wage.

Another statistic – according to the IFS, an additional 300,000 children are expected to fall into poverty by 2015.

“Of the 2.8 million children in the UK living in poverty in 2008/9, a shocking 59% of them have one or both parents in work.”

That is not the shocking statistic, it’s pretty normal for both parents to work in a household. The shocking thing is that 2.8 million children in the UK live in poverty.

Richard,

The shocking thing for a lot of people is that even parents who work struggle to raise their families out of poverty. There is a misconception among some people that only those who ‘don’t want to work’ are poor but the fact is that the minimum wage is often not enough to life people our of poverty.

You are right though in so much as the most shocking thing is that 2.8 million children in this country live in poverty.

Just to second Chaise’s point really:

A young couple earning (say) £490 a week between them (= 35 hours at £7 an hour, x 2) would be doing OK.

A single mum on the same hourly rate, trying to raise three kids on £245 a week, would be in a pretty desperate situation.

So we need to remember that pay increases, like tax cuts, are a pretty blunt instrument when it comes to tackling poverty. If you want to make sure extra money ends up in the pockets of people who need it, you also need to think about benefits, tax credits, subsidised childcare etc.

(NB this doesn’t mean I oppose a living wage, or higher wages in general – I think it makes good sense to increase the amount of money people earn from work before the state needs to step in with top-ups.)

“A single rate for the rest of the country is currently £7.20 per hour. The National Minimum Wage is £5.93 per hour (rising to £6.08 in October).”

As I never tire of pointing out, the difference between that living wage and the minimum wage is entirely the tax and national insurance that is charged to the poor.

£7.20 an hour, 37.5 hours a week, 52 weeks in the year. £14,040.

Personal allowance, £7475. Thus you pay 20% income tax on 6565, or £1,313.

Lower earnings limit for (employees) NI is £97 a week. x 52 is 5044. So, on 14,040 minus 5044, or 8996, you pay 11%. £989.

So, your post tax income from your full time work on the living wage is £11,738.

Divide by 52 and 37.5 to give us your hourly post tax rate.

£6.02.

So, raise the personal allowance and NI limit to full time full year minimum wage and, hey presto, everyone who works full time is now on the living wage.

There, wasn’t that simple? It always surprises me that the living wage campaigners don’t argue for this more forcefully……

Another way of putting it: the best way to help the working poor is to stop taxing them so bloody much.

1
Oliver Cromwell – left wing?
Plato already beat you to it, he was totally against demorcracy.
However, there are different types of democracy, our representative democracy, imo, will always serve the interests of a particular class. No prizes for guessing which one.
7
Nice simple solution Tim, now who is going to pay for all of those tax credits?
And are you aware of the cost of childcare?

“Nice simple solution Tim, now who is going to pay for all of those tax credits?”

Umm, if we increase the personal allowance then the cost of tax credits goes down. For we don’t have to compensate the low paid with a credit for the taxes they’re no longer paying.

And are you aware of the cost of childcare?

What’s that got to do with this?

9
Most single-parents work part-time because their hours correlate with the school day, therefore they need little or no childcare except during school holidays.
In my area, childcare is around £5 per hour, a single-parent with two children would not earn enough to cover the excess hours required to work full-time. (Based on your example of £7.20 per hour)

Tim – There’s a really simple answer to your point and that’s that it would cost an absolute fortune. You’ve got a few options as to how to make up the difference but you’re going to have a really hard time doing it without pissing off a very large number of people.

Steve, we’re not talking about child care or single parents. We’re talking about the living wage.

“it would cost an absolute fortune. You’ve got a few options as to how to make up the difference but you’re going to have a really hard time doing it without pissing off a very large number of people.”

About £30 billion I would say. And you’ll save some/a lot of that back from not having to pay tax credits. Which are, after all, just returning to people the money that’s been taxed off them in part.

But which is going to be easier? The Chancellor announcing a reduction in tax or trying to persuade each and every company in the country, individually, to raise their wages?

And there is the moral point as well. The basis of the living wage argument is that it is immoral that people should work full time and then not have enough to live on.

*Shrug*. OK, so why in buggery are you taxing that pittance they do get then?

1. Is it possible to replace ‘poverty’ with ‘relative poverty’ throughout all the comments below? I think that is what they are referring to, and for clarity should say so.
2. Whether or not you agree with Tim Worstall, to complain about the cost is pretty silly.
If you do it through raising minimum wages, a lot of people will lose their jobs.
For the jobs remaining, employees pass the extra costs on to employees and customers (you can argue about the split if you like).
If you do it through raising tax allowance the government needs to tax more or borrow more (to be paid later by taxpayers).
I can’t see a lot of difference, apart from the lost jobs. And that surely it’s way more efficient to take people out of taxation than to make employees pay them more, check they are doing it, then take a big chunk of the money away from them.

… and then maybe given them a bit back, after they have filled in a bunch of forms.
No wonder government keeps growing.

15. Mr S. Pill

I’m happy with taking the poor out of taxation. I assume Mr Tim W is also in favour of increasing tax on the rich to make up for the lost revenue? Nice to see some old-fashioned redistributionist thinking.

16. Mike Killingworth

[15] AFAIK Worstall is signed up to the view that above a certain level of wealth, taxation is in effect voluntary. Since the article shows that the trend is for an ever greater proportion of GNP to go to those who are above the “voluntary tax” ceiling, the ability of government to deal with the issue of poverty is, presumably, declining year on year.

If government can’t do something there’s little point in demanding that it does it.

“AFAIK Worstall is signed up to the view that above a certain level of wealth, taxation is in effect voluntary.”

Worstall’s not signed up to that idea at all. He is signed up to the idea that above certain rates, higher tax rates lead to reductions in revenue collected. As should everybody be signed up to that for it’s blitheringly obvious, it’s a mathematical certainty.

The question is, what is that revenue maximising rate? That we’re all still discussing whether the 50% rate will in fact raise revenues even in the short term (and we know very well that the long term maximising rate will be lower than the short term one) indicates that there may or may not be room to raise marginal rates at the top end.

Without going into all of the various possibilities (hey, let’s fire a few more bureaucrats, why not?) I’d certainly support a lowering of the 40 % threshold in return for a raising of the personal allowance. For example (no, I’ve not done the sums) I’d be happy with a flat rate of 40% starting at £20k a year. For I really do think that taking the working poor out of the income tax net is a moral requirement.

12
Tim, I’m quite aware of what we are talking about but the majority of part-time jobs are carried-out by single-parents, childcare is a major issue and child-poverty was mentioned in posts 4, 5, 6, with regard to the debate in question.
As far as your suggestion re; taxing the poor, I happen to agree with you, but this is only a small part of the solution, a living wage is always going to be a balance between incoming and outgoings, the clever bit is, how do we make sure that monies are channelled to the most needy.

“the clever bit is, how do we make sure that monies are channelled to the most needy.”

Nothing clever about it at all. Stop taking money off those needy seems pretty simple. If people don’t have enough money, don’t tax them. Simples.

20. Mike Killingworth

[17] And why do higher tax rates yield fewer tax revenues? Because the rich find ways to avoid paying tax. Stop trying to sanitise the fact that you’re a greed-fetishist, Worstall.

19
No Tim
You’ve already tried that one @7, it doesn’t work for single-parents in part-time jobs as I have outlined @10. Even allowing part-time single parents to keep all of their earnings @£7.20 per hour would not, in itself, provide a living wage.

“Because the rich find ways to avoid paying tax.”

Do try reading up on the Laffer Curve. No, it’s not all about tax dodging. It’s about people deciding that doing more work just isn’t worth the candle at 60, 70, 90% tax rates, so they take leisure time instead.

“Even allowing part-time single parents to keep all of their earnings @£7.20 per hour would not, in itself, provide a living wage.”

Well of course it bloody wouldn’t. But which sort of moron is insisting that part time work should be able to support an entire family?

Median full time wages in the UK are only £13.30 an hour and you’d not support a family on that part time either. Not without some help in the form of tax credits, council rents and the like.

22
So who pays for the tax credits? I did ask @8 and @11 pointed-out the problem with the deficit in tax revenues.

Paul – On absolute/relative poverty it seems that there’s not a huge amount in it. The “decent standard of living” level is surprisingly close to the 60% of the median figure. On cost, what in the blue blazes are you talking about, it’s absolutely vital, £30billion is an absolutely gigantic amount of money, you can’t not talk about it because in the end someone has to pay for it.

Tim – The problem with scrapping tax credits is that it fails the “pissing large numbers of people off” test. Eliminating tax credits would see families with kids on average incomes worse off.

The point of the living wage idea is this:
– Firstly, we say that we are a rich society, people who make a contribution by working are entitled to a reasonable quality of life
– Next we do the math and work out a few ballpark figures for this living wage
– We could at this point simply raise the minimum wage, but this is problematic because a) it could be seen as the state interfering in business b) there are businesses that genuinely couldn’t afford to pay it.
– So instead we run a political campaign attempting to persuade people that this is what they really ought to pay, because it’s the right thing.

A key point here is about who pays and the general thrust of the campaign is if they can afford it the employer should pay. This is the kind of campaign that someone like yourself who likes to tell us that you have the best interests of the working classes at heart should be right behind.

“The point of the living wage idea is this:
– Firstly, we say that we are a rich society, people who make a contribution by working are entitled to a reasonable quality of life
– Next we do the math and work out a few ballpark figures for this living wage”

Yes, I know this.

We could at this point simply raise the minimum wage

And this is the point I’m making. We don’t need to raise the minimum wage. We just need to stop taxing it, then all those who do work would be getting your already calculated living wage.

“On cost, what in the blue blazes are you talking about, it’s absolutely vital, £30billion is an absolutely gigantic amount of money, you can’t not talk about it because in the end someone has to pay for it.”

But that cost doesn’t just go away because you’re telling businesses to pay it instead. If it costs £30 billion to get a living wage for all then it costs £30 billion. Me, I say let’s have a few less diversity advisors in order to find the money. Not puch up prices in companies which employ min wage labour: the customers of which are, you’ll not be surprised to find out, generally themselves those on low wages.

“So who pays for the tax credits?”

What tax credits?

In English English a tax credit is the subsidy that low paid people get to comepensate them for the taxes they are already charged. If we reduce tax on low paid people then we reduce, not increase, such tax credits.

As to where we can get £30 billion from…..well, leave the EU and that’s one third of it. You’d be amazed at how easily I could find the other £20 billion. Freeze the slaries of all public sector workers (on median or higher wages) for 5 years. Abolish the Arts Council. I’d have a ball, believe me.

Hey, if you really want, we can have a carbon tax and use it to raise the personal allowance. The numbers are about right too. Stern tells us we should have one of $120 per tonne on 500 million tonnes of emissions. That’s £30 odd billion right there. Bit more actually.

Tim W –

So your ingenious solution is to cut taxes, which is obviously of no benefit to those of the working the poor who are not taxpayers; and then cut the tax credits paid to those of the working poor who *are* taxpayers by £1 for every £1 they get in tax cuts – just to ensure *they* see no benefit either.

Meanwhile, who *would* benefit from that £30 billion tax cut? Oh yes – a whole bunch of middle and high earners.

So the ‘best way to help the working poor’, in your view, is to leave their incomes precisely where they are while boosting the incomes of people better of than them (and presumably reducing spending on public services by, say, fifteen or twenty billion pounds).

Only in Toryland…

28. Richard W

We need to get away from thinking of wealth and poverty in terms of income. All income consists of are numbers in accounts. The ability to consume whether that consumption is basic necessities or a decent house is real wealth. So, as Tim W says stop taxing the meager incomes of the low paid and tax consumption instead. Now, at face value that would tax the low paid disproportionately. Therefore, make it progressive by giving every household a monthly consumption tax credit. Those on incomes above a threshold would receive no credit so would pay full tax on their consumption. The folks on low incomes would receive enough consumption tax credits to take them out of tax altogether. All of a sudden their incomes purchase much more goods and services and the wealthy through their unavoidable consumption are redistributing to those on low incomes. Lefties are delighted and the right are pleased because people are not taxed out of the labour market.

Here is Laurence Kontikoff describing a progressive consumption tax in relation to the US. There is no reason why the same system could not be adopted here.
http://www.bloomberg.com/news/2011-04-27/left-right-can-love-taxes-commentary-by-laurence-kotlikoff-andrew-weiss.html

“So your ingenious solution is to cut taxes”

It is all these morons have. It is there only soloution to every problem. Cut taxes.

Recently while in Florida, I had a look through the local newspaper at the jobs. There were a lot of jobs, but almost without exception they said *minimum wage*. Okay so only a survey of one newspaper and a couple of hundred jobs, however you have to wonder whether a minimum wage destroys competition for labour and holds down wages at the bottom end. Has anyone done any research into this or even looked at whether the minimum wage is making some people too expensive?

Otherwise it’s fascinating that people on this thread who purport to support the *workers* don’t want those on minimum wage to be lifted out of tax. It’s clearly stupid to have an expensive-to-run tax credit system employing tens of thousands of jobsworth to tax people and then give some of it back.

31. Mike Killingworth

[25]

Freeze the slaries of all public sector workers (on median or higher wages) for 5 years… Believe me, I’d have a ball

As did Stalin, Pinochet, Idi Amin and countless others. Why should public sector workers take the strain? (BTW you forgot to mention stopping paying public sector pensions – the Putin solution.)

And your famous Laffer Curve is just a piece of ideology, like the rest of neo-classical economics. We’ve been through this before, but to repeat: either the ceteris paribus assumptions are so restrictive that the situation described bears no relation to the real world, or else the maths becomes so abstruse that even Senior Wranglers have difficulty with it.

http://www.paecon.net/

“So your ingenious solution is to cut taxes, which is obviously of no benefit to those of the working the poor who are not taxpayers;”

Jeebus. What I’m actually saying is that there are too many of the working poor who are tax payers. We should reduce this number. To zero if I had my way.

That this doesn’t help those who are not taxpayers is obvious. Have I said that we shouldn’t still help those? No, I don’t think I did actually.

“and then cut the tax credits paid to those of the working poor who *are* taxpayers by £1 for every £1 they get in tax cuts”

Yes. For we pay tax credits to cover the tax we force them to pay. Don’t chanrge them tax, don’t offer credits.

“And your famous Laffer Curve is just a piece of ideology”

Don’t be a cretin. It’s a simple truth about the universe.

Imagine that someone placed a 132% tax on income from an activity. You could get away with it for one year. Next year, everyone would stop doing that activity. So if your previous tax rate was, say 50%, then your new, higher, tax rate would in the long term bring you less tax revenue.

And, yes, this has been tried in the UK. Roy Jenkins imposed a 132% tax on investment income one year.

Would you now like to consider why there might be a shortfall of investment in the UK economy?

Fool?

30
When the minimum wage was introduced in 1999 (UK), it was estimated that it would help two million people, so we can assert that, at that time two million people had a rise in pay.
It is impossible to assess whether any future jobs would have paid more than the minimum wage without the legislation, but my guess is not.
IMO, it was the introduction of tax credits which determined that employers paid the minimum wage and no more, but, of course, this cannot be tested either, unless you infer from theorists like Adam Smith, that employers will act in their own interests.

When I see banks and other business’s hiring top people for half what they are getting paid, I might take you seriously.

But I think we have seen that high pay for the top people means fuck all in performance. The whole “market forces in wages “ nonsense is a rigged game for the benefit of the rich global elites.

Ok, I’m no economist like some that grace these hallowed pages but surely Tim, even if you don’t agree with his political views, is making some sort of sense here.

When a society has to give back tax paid by it’s lowest earners in the form of a credit, surely the next logical step is to take them out of income tax altogether. I don’t imagine that returning that money is cost free. Doesn’t that make the whole process kind of inefficient? Like employing one bloke to dig a hole and another to fill it in again?

I imagine that it would help generate consumer confidence again. People would see that they had more money in their pay packets, likely generating some of the tax that would be lost in the sort term and kick starting that all elusive growth that successive governments have promised us.

Another possible benefit would be that the army of folks who administer these credits could be retrained and set to work going after tax evaders and trying to close that enormous tax gap that we keep talking about. In no short order the entire enterprise pays for itself.

I honestly can’t think of anything more ‘progressive’ than cutting tax for the poor and I can’t believe that people on these pages are attempting to argue otherwise.

36. Mike Killingworth

[32] You don’t understand logic, do you? Your argument is that a wealth tax (which is what a tax on income of over 100% is) is unsustainable in the medium to long term. If that is so, how come we have a wealth tax in this country, and have had one for longer than we’ve had income tax. Since you’re so bright, I’ll leave you to figure out what that tax is called. (Hint: in its present form, it was devised by Michael Heseltine.) It’s widely regarded as our most efficient tax (goose, feathers, hissing – you remember that lecture, I’m sure) and there is little or no evasion.

So far you haven’t produced any evidence – as opposed to dogma – as to what the most efficient tax rate is. Of course there is one, but it may not be the same this year as last or the one before – remember Harrod on steering the economy – brake, accelerator, rear-view mirror but no windscreen or steering-wheel?

Let’s go back to the original post for a minute. Each year the proportion of the nation’s wealth in the hands of the seriously rich, as opposed to the comfortably off, goes up. Let me propose an alternative to your famous Laffer curve. This is the hypothesis that the more people hire tax accountants, the lower the “most efficient” rate becomes. As we know, for the likes of Rupert Murdoch, taxation is voluntary. Whilst such people account for only 5% of national income, we can, perhaps, put up with it. But they are going to account for 14% in less than twenty years, it is suggested and this alone will seriously mess up your Laffable curve.

Excellent, so we agree then, there is a Laffer Curve and there is a tax rate above which we get less revenue not more.

I also agree that this rate changes along with other things in the society. For example, it will be lower when people are allowed to leave the country than it will be when they aren’t.

But that still leaves us rather cramped in our style. We can’t tax more than a certain amount and we also, for what at least I consider the moral grounds listed above, shouldn’t be taxing the incomes of the poor at all.

So, that’s the constraints that we have to work under. Those are the limits we’ve got on how much tax we can extract from the populace.

And if we find that that amount of tax doesn’t pay for everything the government wants to do: well, we’re just going to have to have less government, aren’t we?

38. Mike Killingworth

[37] Well, if that’s what the Laffer Curve is, it doesn’t tell us very much. You sound a bit like my GP when he told me I had Chronic Pulmonary Obstructive Disorder which is a posh medical way of saying that I’ve f*cked up my lungs by smoking for all those years – which I knew before I went to see him. A posh name for the bleedin’ obvious.

Your last paragraph implies that you think the Curve applies to all government taxation. Previously you seemed to think it applied to income tax alone.

@ Tim W

“That this doesn’t help those who are not taxpayers is obvious. Have I said that we shouldn’t still help those? No, I don’t think I did actually.”

No, but you *did* claim that the best way to help the working poor *in general* was your £30 billion tax cut. So it’s hardly unreasonable of me to point out that that policy is not in fact ‘the best way’ (or any way) to help many of the people you’re talking about.

“For we pay tax credits to cover the tax we force them to pay. Don’t chanrge them tax, don’t offer credits.”

FIne – but of course it would be flatly false to suggest that that would ‘help the working poor’ by increasing their net incomes. It would leave their net incomes precisely where they are, while boosting the incomes of those better-off people who gained more from the tax cut than they lost in tax credits.

So for those of us who believe in kooky left-wing ideas like “income gaps” and “relative poverty”, your proposed policy doesn’t just look like it fails to help the working poor – it looks like it positively harms them by driving *down* their incomes relative to higher earners, leaving more of them in poverty.

Oh, and of course it’s also misleading to suggest that (for many of the working poor, anyway) “we pay tax credits to cover the tax we force them to pay”. Many of these people receive *more* in tax credits than they pay in tax and NI. (When I was on £14,000, my family was receiving around £4,000 in tax credits; but as your calculations show, my tax and NI bill was less than £2,500).

“A posh name for the bleedin’ obvious”

Quite. That’s why types like me get so irate when people say that there’s no Laffer Curve. It is the bleedin’ obvious and as such is something that has to be taken into account. It can’t just be rejected, because it really is a feature of this universe we inhabit.

“Your last paragraph implies that you think the Curve applies to all government taxation. Previously you seemed to think it applied to income tax alone.”

It does apply to all taxation. But each and every tax will have its own curve. A 50% income tax has different effects from a 50% tax on ciggies. Depends on elasticities in part.

We could apply it to the economy as a whole: trying to tax 90% of everything would, ‘m sure, bring in less cash than trying to tax 50% of everything. But that aggregate figure would depend at least in part on which taxes were being used, and the individual curves for each tax.

The Laffer curve itself is indeed obvious: the implications of it not so much.

“When I was on £14,000, my family was receiving around £4,000 in tax credits; but as your calculations show, my tax and NI bill was less than £2,500)”

And thus your insistence that tax cuts would not increase the incomes of the working poor fails.

For I’m not suggesting that we don’t have tax credits, that we abolish them. Only that if we tax people less then we’ll need to pay them less in tax credits. Thus the effect on the tax budget of reducing taxation isn’t static: there’s a dynamic effect.

In the numbers you give: Currently there’s income to the Exchequer of £2,500 and expenditure of £4,000. Move the income tax and NI allowance to £14,000 say, and income to the Exchequer is £0 and expenditure is £1,500.

Yes, you’re right, income of that family is unchanged here. But the cost to he Exchequer is not the £2,500 lost in tax. The actual net cost to the Exchequer here is zero. So, sorting this out won’t cost the full £30 billion number I gave above, will it?

That is the only reason I mentioned tax credits, to point out that it won’t cost as much as some might think.

We also get some nice side effects. We get to fire a few bureaucrats who are currently just shuffling that money around. We lower marginal tax and benefit withdrawal rates on the working poor (as the budget tells us, there are hundreds of thousands on marginal rates of 70, 90, a few even over 100% and millions on over 60%) and yes, just as I argue that high marginal rates on the rich can reduce tax, income and GDP, so the same is true of the poor facing similar or higher rates.

All good stuff and why I think the plan should be implemented.

42. Mike Killingworth

[40] So, let me just check that I have this straight.

* There is a different Laffer curve for each tax. When a government devises a wholly new tax, as Callaghan did in 1965, or Pitt the Younger did when he invented Income Tax, there was a Laffer curve for it, but no one knew what it was (it was inside a black box, much like Schroedinger’s cat) so there was no way either Pitt, Callaghan or their detractors could tell if it had been introduced at an effective rate.

*For any given tax, the Laffer curve next year may differ from this year’s or last year’s. There’s no way to tell – see my earlier reference to Harrod.

It is not so much a predictive tool as an ideological shillelagh. Or at least, that’s what Laffer intended it to be.

Correct, economics can be difficult. Our only method of working out what the inflection point is is to try it and see. And we’ve one this a number of times over the centuries with income tax.

So, with income tax we’ve got at least some information. Empirical estimates cluster around, for the long term and for income tax, that peak being somewhere in the 35-50% range.

BTW, Laffer didn’t invent this at all. We use his name as he revived it, but it’s there in Keynes, heck, it’s there in the rudimentary medieval Islamic economics.

Steve C –

OK, bear with me and I will try to explain why some of us lefties don’t think ‘lifting the poor out of tax’ is the best way to go.

“When a society has to give back tax paid by it’s lowest earners in the form of a credit, surely the next logical step is to take them out of income tax altogether. I don’t imagine that returning that money is cost free. Doesn’t that make the whole process kind of inefficient? Like employing one bloke to dig a hole and another to fill it in again?”

FIrst of all – many people on low incomes receive more in tax credits than they pay in taxes. So even if you ‘lifted them out of tax’, you’d *still* have to employ the bloke(s) to calculate and pay tax credits to ‘top up’ their incomes.

Secondly – raising the tax threshold is an *appallingly* inefficient way to make poor people better off. The Lib Dem policy of raising the tax threshold to £10,000 costs around £15 billion. Of that £15 billion, *less than 10%* ends up in the pockets of very low-income households that have been ‘lifted out of tax’; around 20% ends up in the pockets of low-income households that still pay some tax; and around 70% ends up in the pockets of households that are already in the top half on the income distribution.

“I honestly can’t think of anything more ‘progressive’ than cutting tax for the poor and I can’t believe that people on these pages are attempting to argue otherwise.”

Whatever else it is, the policy of ‘cutting taxes for the poor’ by raising the tax threshold is certainly not ‘progressive’ in the usual sense of giving most to those who have least and least to those who have most. Consider a few sample households:

Household 1: Single parent working 16 hours a week, earning £120.

Household 2: Single parent working 20 hours a week, earning £150.

Household 3: One parent working 16 hours a week, earning £120; one parent working 35 hours a week, earning £300.

Household 4: Two parents working 35 hours a week, each earning £500.

If you raise the tax threshold from £6,500 to £10,000 – the Lib Dem policy – household 1 is left no better off; household 2 is left around £300 a year better off; household 3 is left around £700 a year better off; and household 4 is left around £1400 a year better off.

That’s clearly regressive; and the picture looks even worse when you consider the overall effect on income inequalty and relative poverty of boosting the incomes of mid-to-high earners while allowing the incomes of very low and non-earners (pensioners, the disabled, the unemployed etc.) to stand still.

A rise in the tax threshold is just an old-fashioned across-the-board Tory cut in direct taxes, with most of that money ending up in the pockets of middle and high earners. The stuff about ‘lifting the poor out of tax’ is just spin.

The Laffer Curve idea is plausible, but has there been any real evidence of its existence? It strikes me as being hard to unpick its existence from noise. It’s anice idea, and obviously gives a great post-hoc argument for those who don’t like taxation. A quick look at Wikipedia suggests figures as varied as 35% and 70% for optimum taxation. At best that suggests significant cultural variation.

Of course, Tim has made a very strong argument for reducing marginal taxation and increasing the tax burden on the wealthy.

46. Luis Enrique

G.O.

I think you’re hoisted on your own petard – by your criteria @44 the “living wage” is also regressive because obviously an increase in the hourly wage is going to help household 4 much more than household 1. Similarly, trade unions, which fight to improve the pay and conditions of working people are regressive for the same reasons (and for the additional reason that some of the strongest trade unions cover trades where wages are far above the minumum wage).

The fact that improving the returns to low-paid labour does helps those who are working full time more than those who are not working so much, or not working at all, is not an argument again trying to improve the returns to low-paid labour (see: the living wage!).

[ It might, however, be an argument that we also need to help those working fewer hours or not working at all ]

47. Luis Enrique

[I always imagined being hoisted on a petard involved being put on the end of a sharp stick, or something. It doesn’t it means being blown up by your own grenade. So there you go].

“Of course, Tim has made a very strong argument for reducing marginal taxation and increasing the tax burden on the wealthy.”

Quite. Let’s actually not tax the poor and only tax the rich (or high incomes).

And then cut the state to fit what we can raise in such taxation. It really wasn’t all that long ago, a few decades only, that those on less than median income just didn’t pay income tax. I think that fair and justifiable. The rich should pay for government and only the rich should pay for government.

That just means that we can only have as much government as the rich can pay for.

For example, the total incomes of all top 10% households are of the order of £280, £300 billion. The top 10% are (not exactly, because of the diffrence between individual incomes and household incomes) roughly those who pay the 40% higher rate of income tax.

So if we’re going to make the rich pay for everything that’s a limit on how much government we can have, isn’t it? I’m just fine with taxing them and only them and then having as much government as we can afford.

Which is a lot less than we have right now.

49. Luis Enrique

re: the Laffer curve.

Obviously the amount of revenue generated as the tax rate increases is more complicated than supposing income, revenue, whatever – call it Y – stays constant and calculating (tax rate)* Y

Anbody who proposes raising taxes without thinking about how the pattern of economic activity is going to change as a result, and consequently how that will affect the relationship between teh tax rate and the quantity of revenue gathered, is an idiot. As far as I can see, there are as many idiotic right wingers thoughtlessly citing Laffer curve ideas to oppose tax increases as there are iditotic left wingers thoughtlessly denying or ignoring Laffer curve ideas to support tax increases.

As has been discussed, it’s hard to know what the true relationship between tax rates and revenues is. The idea that tax increases greatly reduce the level of economic activity is debatable and might be an example of what Chris Dillow has recently called right-wing elacticity optimism. Here is a very informative short post about the relationship between income taxes and labour effort (hours worked). [if you are interested in this stuff, add Lane Kenworthy to your RSS feed, he’s brilliant]

[although the following does not invalidate Laffer curve ideas, it’s perhaps interesting that the thought experiment often cited to explain the Laffer curve – “what if taxes hit 90%?” doesn’t quite work becuase at that level it wouldn’t be a matter of private agents not bothering to work or invest because the state is taking 90% of the resulting output – at that level, we’d be in to a command and control economy where the state would be employing people and directing investment. What’s interesting is how happens as 90% becomes 60% or 40% because to some extent the state is then directing investment and providng employment, which itself will mitigate the “private sector agents not bothering to work so much” problem. Of course whether state sector production is as productive as private sector production is antoher question.]

50. Luis Enrique
51. Luis Enrique

One more link, to support the idea that a large state and high taxes don’t necessarily inhibit economic activity – read In Norway starts-ups say ja to socialism

52. Richard W

I think Laffer arguments are slightly distracting. What is obvious is many people who can only realistically gain low-paid employment in the labour market face huge marginal tax rates moving from benefits to employment. Moreover, their low wage does not purchase much consumption because of indirect taxes. Therefore, what can we do about that situation? Ask employers nicely to pay them more. OK, try it. Government mandates for higher wages? Wage differentials would be maintained and all other wages would increase pushing inflation higher and the real wage would just be the same as before.

The only realistic way to raise the incomes of the lowest paid is through government transfers and or reducing the tax that they pay from their incomes. Everything else is failed wishful thinking. Now, there is an argument to say that employers would respond by paying the low-paid even less as the low-paid had their tax burden eliminated. To believe that one must assume employers do not compete for labour. Moreover, employers collude to be particularly nasty to their lowest paid employees.

Tim W

“And thus your insistence that tax cuts would not increase the incomes of the working poor fails.”

I never insisted that tax cuts would not, *taken in isolation*, increase the incomes of (some of) the working poor. I insisted that *your proposed policy* of cutting the taxes of (some of) the working poor while reducing their tax credits by a corresponding amount would not increase their incomes…

“Yes, you’re right, income of that family is unchanged here.”

…which you concede is the case.

“But the cost to he Exchequer is not the £2,500 lost in tax. The actual net cost to the Exchequer here is zero. So, sorting this out won’t cost the full £30 billion number I gave above, will it?”

No – which is why I suggested above that the level of spending cuts required to cover the net cost to the Exchequer of implementing your policy might ‘only’ be £15-£20 billion.

“We also get some nice side effects. We get to fire a few bureaucrats who are currently just shuffling that money around.”

This doesn’t strike me as *obviously* true. Money is still being shuffled around in the form of taxes and tax credits; it’s just that less of that money is being collected from families to which it is then returned.

“We lower marginal tax and benefit withdrawal rates on the working poor”

No – we lower marginal tax rates, while *increasing* the withdrawal rate of the main in-work benefit – tax credits. Otherwise the reduction in tax credits wouldn’t ‘balance out’ the reduction in taxes in the way you describe.

(For instance: under the present system, say my income increased from £12,000 to £13,000, my tax bill increased by £300, and my tax credits were reduced by £350. Net benefit to the exchequer: £650. Net benefit to me: £350.

Now say my income increased from £12,000 to £13,000 under your proposed system. My tax bill stays at £0. If the exchequer wants to recoup the cost of that £300 in lost tax revenue by reducing my tax credits, as you suggest it should, it is going to have to reduce my tax credits by £650. (Net benefit to the exchequer: £650. Net benefit to me: £350. Tax cut and tax credit cut ‘balance out’.) That means increasing the withdrawal rate of tax credits from 50% of net income (50% of £700 = £350) to 65% of net income (65% of £1000 = £650).)

@ Luis:

“It might, however, be an argument that we also need to help those working fewer hours or not working at all”

That’s the long and the short of it. It’s an uncomfortable but self-evident truth that if you *only* boost the incomes of people in work, many millions of people on very low incomes (pensioners; the unemployed; students; the disabled) are going to be left relatively worse off. The income gap between the bottom and the middle is going to increase and the number of people living in relative poverty is going to increase.

Which is why I was arguing @ 6 that

“we need to remember that pay increases, like tax cuts, are a pretty blunt instrument when it comes to tackling poverty. If you want to make sure extra money ends up in the pockets of people who need it, you also need to think about benefits, tax credits, subsidised childcare etc.”

54. Luis Enrique

G.O

ah – I hadn’t seen that you made the same point about wage increases as you did about tax cuts. So no hoisting on any petard: you are being consistent.

Still I get the impression that others who object to the LibDem “raising the tax threshold idea” on the basis it is regressive do not object to the living wage or trade unions on the same basis.

@ Luis

“obviously an increase in the hourly wage is going to help household 4 much more than household 1.”

… and I think this is a bit misleading.

(Just to get a quibble out of the way first: the parent in household 1 was already earning £7.50 an hour – more than the ‘living wage’.)

If you consider a poor household where one person earns £6 an hour and a well-off household where two people each earn £15 an hour, clearly the introduction of a living wage of £7.20 an hour is going to benefit the former rather than the latter. In fact, you might expect to see some *negative* impact on the incomes of better-off households from the introduction of a living wage, as a higher proportion of companies’ wage bills would be being spent on their lower-paid employees.

This thread seems to have gone a bit off piste since I left it but in response to Tim W:

There are plenty of things that the state pays for that we might view as unnecessary, there are also examples where the state runs things badly. But there remains the problem that the unnecessary items are not a significant cost. And ability of the government to deal with badly run services is limited. The problem is that the moment you start talking about redirecting money in the billions you aren’t going to do it without changes to the big ticket items and that will mean taking money from someones pockets and the political consequences that go with it. As nice as the idea taking the poor out of tax is, politically it’s very hard to do. In comparison, a living wage is a far easier option.

On the distributional effects of a living wage, it’s true that some of the cost might be foisted on the consumer, but it seems to me unlikely that it would be more than the definite effects from a change in state spending.

As a final note, I’ll say that I view you decision to turn a discussion on a voluntary campaign pressuring employers into a discussion on taxation a clear indication of exactly where your political allegiances lie.


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