Why Don’t We Just Abolish Tax Poverty – Instead Of This Living Wage Nonsense – Altogether Then?

As we all know there’s much muttering about how low pay should rise, about how there’s some just and righteous minimum that anyone should earn for their labour. That the universe doesn’t work this way, there is no set value to whatever it is that you wish to do with your life, doesn’t matter. The political head of steam has been raised and that’s that.

The correct response is therefore to consider how we do this, not whether. And the answer is that if we wish the poor to have more money then we should stop taxing them so damn much. For, as various of us have been pointing out for a decade and more, the difference between what people do get paid and the amount they should – according to the campaigners’ should that is – get paid is almost entirely explained by the unconscionable amount that poor people pay in tax upon their incomes:

Assume 37.5 hours a week. Assume current (well, that 12,500) allowances. Assume the current living and national living wages. So, that’s £17,550 and 15,268.5 for annual incomes. No, we shouldn’t consider the London wage for that very point shows us that we shouldn’t be having a national minimum wage anyway. By that very agreement that it shouldn’t be the same everywhere we’ve just abandoned the idea that it – well, obviously – should be the same everywhere, haven’t we?

By assumption the income tax free allowance is 12,500. The NI allowance is 162.01 a week, or 8,242.52.

Basic rate income tax is 20%, NI is 12%.

On that Living Wage, as calculated by the campaigners, £1,010 income tax is due (17,550 minus 12,500 x .2)and 1,116.90 NI (17,550 minus 8,242.52 x .12). That’s a total tax take – recall, on this minimum amount we all think that is the just and righteous price for someones’ labour – is £2,126.00. We’ve a system where the poorest workers in the country, those earning the barest crust worthy of a reasonable life, get well more than 10% of it nicked off them to pay for government ineptitude. And do note the next.

The National Living Wage is £15,268.50. The post tax Living Wage is £15,424.00. Or a £155.50 per year differences. Or even, an 8 pence an hour difference.

The Centre for Policy Studies – the other group other than us at the ASI who have been making this point, fighting this good fight, over the years – have a new report out from Tom Clougherty. Worth pointing out that Tom signed off on my cheques when I was first writing about this at the ASI – and the CPS has been on the case for longer than that. They are suggesting:

Hence this report’s clear and simple
recommendations. First, that everyone should
be able to keep the first £1,000 they earn each
month – a universal working income, free of
income tax and National Insurance alike. And
then, that the tax system should always let
them keep at least 51p in every extra pound
they earn – a guarantee that work will always
pay. That includes cutting the Universal Credit
taper rate further to avoid the benefits system
clawing back what the tax system gives.

The narcissism of small differences is at work here, of course it is. I think it an error to tie anything to a cash sum. For inflation will make that an irrelevance over time. As it has in fact caused this very problem in the first place. Immediately post-WWII the income tax system (as opposed to NI) was something that really only troubled those on median earnings or above. Successive Chancellors often enough raised the personal allowance by inflation – G. Brown even managing to fail to do that – but none really raised it by earnings growth. Thus ever lower – compared to median – earnings got caught in the income tax net until we ended up where we were in 2010, when someone working part time on the minimum wage was being charged that income tax.

Thus tie to some movable feast, not some cash number. So, my preference for whatever people claim the full time, full year, minimum wage should be. That moves with fashion, economic and wage growth.

The other point, the marginal tax rate, that’s very sensible indeed. Start with the Laffer Curve. It exists, it’s a mathematical identity. The trick is what tax rate maximises revenue? Or, to ask the same question the other way around, what tax rate dissuades people from bothering to work? This is normally studied for rich people – reasonable answers being around 50, 55% in income. No, not income tax, tax upon income, so include NI.

When we combine benefit withdrawal and tax rates we can end up with rates very much higher than this. Budgets certainly used to include the Chancellor telling us how many faced marginal rates above 60% – millions – 80% – hundreds of thousands – and even above 100% – tens of thousands of unfortunates. Work more, they get less.

Now, it’s true, that mix of income and substitution effects could be different for poorer people than richer, leading to a different Laffer peak, a different marginal rate which overall discourages work. Wouldn’t surprise at all to find that the income effect is stronger for the poor for example. Yet note what this insistence upon a 51% top marginal rate is. Only the insistence that poor people are peeps just like rich peoples is peeps. We all react to the incentives in front of us. Tax rates on labour income which are “too high” dissuade us from labouring for an income. Fine detail not being a notable feature of government activity, let’s just assume that all react the same way to the same level of incentives.

Thus the marginal tax and benefit withdrawal rates faced by the poor should be the same as those tax rates upon income faced by the richer. On the same basis. Too high rates dissuade work and make us all poorer. All note, not just those being taxed.

OK, good enough, let’s go and end tax poverty then, shall we? That being the poverty caused by the poor having to pay too much tax.

There’s also a moral point to this:

That the low paid in the UK receive too little in the way of income is becoming a
commonplace observation. In this paper we suggest a simple manner of increasing
those incomes, one that is entirely in the power of the government to deliver immediately:
raise the income tax and national insurance allowances to the level of
the full time, full year, minimum wage. (NB: All figures in this report refer to the
national minimum wage of £6.50/h as at 8th of July 2015)
This would, as the IMF has recently noted, increase the GDP growth rate and 2
would, in part, pay for itself.
Further, this would immediately convert the current minimum wage into the net
income provided by the Living Wage that many are demanding.
We think that it is simply immoral to be charging high taxes on incomes to those
with low incomes and thus support such a measure on that ground alone. The additional
benefit of being able to entirely abolish, by the standards currently used,
in-work poverty by the same measure is to us simply a bonus.
What follows is a discussion of the details. Our basic point is that if we want to
increase the incomes of the working poor, which we do and many others say they
do, then we should start by not taxing them so damn much.

A reasonable complaint is that we might think the poor of Britain don’t have enough money. A reasonable observation is that we tax the incomes of said poor of Britain. An obvious solution is to end tax poverty – just stop taxing the incomes of the poor so damn much.