This is – according to the Labour Party – the start of “Living Wage week”, a soundbite policy of the kind we’re now used to hearing from Labour.
Superficially, the idea of the Living Wage is simple and tempting. Figure out how much it costs to live, and force employers to pay that much.
Labour’s chosen method of doing this is to offer employers tax breaks – for a year – if they comply with the Living Wage rather than the national minimum wage. However, as pointed out by the Adam Smith Institute, what we are actually dealing with is Tax Poverty Week.
Labour’s plan – to increase the wage floor in the UK by offering incentives to employers which is paid for by the increased tax on the employee – stands in direct opposition to Liberal Democrat policy. As the Adam Smith Institute aptly puts it:
The sugggested Living Wage of 7.20 an hour is a pre-tax wage. Once you’ve taken off the tax and NI due on that sum the resulting post-tax income is only 50 pounds a year different from what the minimum wage untaxed would be. Therefore the minimum wage is indeed the living wage except for the depredations that government makes into the pocketbooks of the poor.
This is the same factor that Adam Corlett pointed out an entire year ago right here on LDV – with a handy graph I shall now reproduce:
Worse still, the Labour incentives to employers to take up the Living Wage last only a year. At the end of that year, the employer is left with a vastly increased wage bill, and the Labour Party will run off with the tax to waste on the next ineffectual soundbite policy.
Lastly, not only is the policy bad for business in general terms, but it’s especially bad for small businesses. Big businesses will be able to absorb the higher wage bill in order to claim the lower tax rate (and of course outsource their minimum wage cleaners and other support staff). Small businesses will face the stark reality of a competitive tax disadvantage compared to larger, market dominant companies.
The Living wage is yet more of the same from Labour – balancing the backs of state interventionism on the poorest in society. Let’s not raise wages in order to tax the poor more. Let’s just tax the poor less, or better yet, not at all.
* Alisdair Calder McGregor is a member of the party's Federal International Relations Committee.
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33 Comments
“The Living wage is yet more of the same from Labour – balancing the backs of state interventionism on the poorest in society. Let’s not raise wages in order to tax the poor more. Let’s just tax the poor less, or better yet, not at all.”
The trouble is that this government, in cutting taxes for all basic rate taxpayers – not just the poor – has balanced the books by cutting benefits for the poor, and has achieved more or less exactly what you are saying Labour’s plan would do.
In contrast, at least the effect of Labour’s proposal would be targetted at the low-paid, and the incentive would be paid for from general taxation – not just taxation on the poor. It seems a pretty good idea to me.
As for the low-paid being only £50 a year better off than if the minimum wage was untaxed, the question is how that huge general tax cut – the bulk of which would go to those on middle incomes – would to be funded. If the actions of this government so far are anything to go by, any advantage to the low-paid would be more than cancelled out by cuts elsewhere.
How amusing – a Libdem ‘activist’ going into bat for regressive, exploitative companies while flying the flag for the Adam Smith institute. Never mind that suppressed wages inevitably lead to government picking up the tab via expanding benefit claims for people whose wages are miserly and low. Never mind that as a nation we are having our expectations downsized in order to accommodate the endlessly rapacious needs of investors and shareholders – never mind all of that. Whats important is to gurgle on about profligate Labour (while nodding through vast waste by the Tories) and abandon what vestiges remain of the moral anger this party used to feel on behalf of the disadvantaged. Yeah, when you’re a Liberal in government you can normalise just about any outrage.
I’m glad you only think it’s only 50 pounds a year that people will be better off , so it’s not worth bothering about. When your low paid as the advert says ‘ every little helps’.
@ mike cobley
Come on, this is a well thought out article. By increasing the tax threshold so those on minimum wage don’t pay tax, their take home pay is increased to almost as much as if they were paid the living wage and taxed.
But you’re not running the risk of creating unemployment. That’s pretty compelling and made me rethink my ideas on this. I imagine the best result would be to increase the tax threshold while also applying a significant increase to the minimum wage, which I believe is what’s currently in the manifesto
Thank you Alisdair for pointing out the flaws in Labour’s plans. We haven’t as a party got nearly as much credit as we should for pushing the personal allowance up to £10k – something Labour would not have done and the Tories not on their own. We should I believe be pushing for a PA at the level of the take-home pay for the minimum wage and sell this (quite rightly) as a real, permanent living wage – not a costly one year gimmick as Labour propose.
Whatever the merits of Labour’s plans, taxing lower earners less comes with its own risks. Lower earners are far more likely to use tax payer funded services, or indeed receive some form of benefits. By reducing the amount they pay into the system you create a notable disparity with medium to higher earners whose taxes are now used to pay for things mostly used by people who don’t pay tax at all. This breeds resentment and fuels arguments about scroungers and cutting public services.
Is this the intention of the policy? Hard to think not when you see that it is those ideologically indisposed to state funding that promote it the most…
Let’s remember that whilst our poor are quite rightly the Lib Dems’ number one priority, there is also the issue of the “squeezed middle”, who voted strongly for us in 2010 and feel particularly let down now. Raising the thresholds on all direct taxation to the National Minimum Wage helps them too and they are a group that should be deserving of our help. The only people not helped by this policy are the rich, and quite rightly so.
I personally think it’s better to tax people less than to give them more benefits. Artificially reducing the wages of some of our poorest and then telling them that the government is being nice by giving them benefits is a terrible con.
I’m also happy to point out that I discussed this with Tim Farron yesterday and he is in complete support and really wants to push for removing all income tax and National Insurance from National Minimum Wage earners to be one of our manifesto priorities.
“We should I believe be pushing for a PA at the level of the take-home pay for the minimum wage and sell this (quite rightly) as a real, permanent living wage – not a costly one year gimmick as Labour propose.”
Actually, the Labour proposal is not intended to cost anything, because it would save the Treasury so much in tax credit payments.
Raising the tax allowance to the level of the full-time minimum wage, on the other hand, would be hugely expensive, and would be grotesquely inefficient as a way of benefitting the low-paid, because the bulk of the money would go to those on middle incomes. That’s if a way could be found of raising the money without taking it away from the low-paid with the other hand – which is the way this government has funded its tax cuts so far.
@ G
I don’t think this will happen as a raise in the tax threshold is perceived as a benefit to all, even higher earners (although the reality is its no benefit to higher tax payers). Low paid people will still be paying plenty of tax in VAT, council tax etc.
@Chris
The fact the increase in the tax threshold benefits more people than just the poorest is a great strength of the policy. Its something a lot of people can get behind and will help to overall reduce the cost of living. As discussed in the 2015 manifesto proposals we can pay for this tax cut through taxes in wealth (mansion tax and suchlike).
“As discussed in the 2015 manifesto proposals we can pay for this tax cut through taxes in wealth (mansion tax and suchlike).”
As the Mansion Tax is projected to raise £2bn at most, we can only hope that “suchlike” will prove to be much more lucrative!
” a soundbite policy of the kind we’re now used to hearing from Labour”
Er, which main party DOESN’T use soundbites? You’re entitled to your opinion on policies, but don’t be hypocritical. I get plenty of Lib Dem correspondence in my area about “One Million Jobs”. The Tories with their “hard working families” “get on with life”. Labour with its “one nation” and “squeezed middle” slogan.
And you wonder why people are growing disillusioned by the main parties. Focus group wonkery at its finest.
From Chris: “In contrast, at least the effect of Labour’s proposal would be targetted at the low-paid, and the incentive would be paid for from general taxation – not just taxation on the poor. It seems a pretty good idea to me.”
I agree.
I would like to predict a rash of 5-year pay deals that involve four years of pay freeze in return for a big rise in 2016.
@Neil
” a soundbite policy of the kind we’re now used to hearing from Labour” – Er, which main party DOESN’T use soundbites?”
I take Alisdair to mean, in his excellent article, that we get little other than soundbite policies from Labour these days.
That is not the same as saying that only Labour are guilty of producing soundbite policies.
I think the way to argue against this is not by saying it makes the poor pay more tax, but that Labour would rather have people living on benefits than earning the minimum wage. It just leads to a black-market economy.
Just remembered they aren’t promoting a mandatory living wage (yet?), so maybe the tax angle is the one to attack the idea with, but it is only a small incentive that Labour are offering so there isn’t much room to attack.
I think the Lib Dems have boxed themselves into the corner by embracing welfare sanctions because welfare sanctions without a living wage is not very compassionate.
“I think the way to argue against this is not by saying it makes the poor pay more tax, but that Labour would rather have people living on benefits than earning the minimum wage. It just leads to a black-market economy.”
?
The purpose of the Labour proposal is to give employers an incentive to raise salaries. The idea is that it would fund itself by reducing the amount of benefits paid to those on low incomes.
I am happy with the notion of ending labours dependency based client-state, but:
Are lib-dem plans to raise the threshold to ~£12,500 predicated on including NIC’s in the threshold?
As far as i am aware the threshold for NIC’s is quite separate, and much lower, than the base income tax threshold the coalition has raised to date….
Thanks for the comments everyone. Some responses;
@chris: Yes, LibDem policy is cutting taxes for a lot more people that just those on NMW. It’s not everyone, but it is there for a lot of people. It has to be, because otherwise there would be a tremendous marginal rate effect. As Tommy Long said later, it’s also a boost for those in the middle who are feeling something of a pinch too.
@mike cobley: I’m quite happy to support the ASI when I agree with them. I’m also quite happy to slate them when I disagree with them.
@Vincet: £50 a year that you have to apply for and half the people eligible don’t bother to fill out all the required forms to get. Worth noting that if it takes you more than 6 hours to claim the £50 benefit to which you are entitled, then effectively the form-filling exercise pays less that NMW 😛
@Gareth Wilson & Julian Tisi – thank you for the kind words. Gareth is right about job creation, Julian I am very glad you pick up on the time-limited nature of Labour’s offer compared to the long-term plan from the Liberal Democrats
@g: You raise a serious issue there, but it’s not an issue I think you win by giving in and accepting that the poor should be crippled by taxation. People are not just tax-cows for the state to milk, and peoples place in society is not linked to their monetary worth or earnings. To claim it is is to devalue other non-earners, such as pensioners, the disabled, students and children. What must be done is to challenge at every opportunity the awful idea that both Labour and Tories promote that people are only good for their wealth or their taxes. We must see people as vibrant individuals and not give in to the rhetoric of those who can only see people as owners or earners.
@Tommy Long: I’m very glad to hear of your chat with Tim – I’ve had similar conversations with him and others myself. We need to handle the NI threshold with care, but NI is the elephant in the room as far as tax goes – the tax that dare nt speak its name.
@Simon Shaw: Just so
@JediBeefTrix as yet there is no policy on NI, but it is talked about a LOT by Liberal Democrats in consultation sessions. NI is regarded as a thorny, problematic area that desperately requires reform but is going to be very difficult to do. However, there is broad consensus across the party that is not fit for purpose.
In Bath, your Councillors were to remove services from children who are vulnerable, also the CAB. The required number of signatures has been made, to call on the Councillors to rethink the unthinkable.
I am proud to be supporting my new Party, the Labour Party on the Childrens Services and the collection of signatures. I think that you have got the wrong idea, it is to improve the lot of those who have the “bedroom tax” and live on from the “food banks.” Read about children with Rickets and those who send their children to school hungry.
Mr McGregor – Whilst I don’t disagree with the thrust of what you have to say here, surely there is a wider problem in this picture. Increasing personal allowances has been great from the perspective of being a work incentive, and plainly work should be preferenced over benefits. And indeed Labour’s idea this week is not particularly impressive.
But that does not detract from the very basic point that the devaluation of labour is a real problem. In 1972 my Dad on a SINGLE production line wage was paying the mortgage on a 3 bed semi (with double-digit interest rates), raising a family, driving a car and saving for a pension. I most certainly do not want to look back at the time as some land of milk and honey – it wasn’t. However for many young, and indeed no so young people things my parents took for granted are out of reach.
The calls for a living wage are a symptom of a problem. That those calls create economic pressures is unfortunate. But the fundamental problem remains that the gap between wages and, ‘stuff,’ has grown pretty horribly. You say, ‘People are not just tax-cows for the state to milk.’ That’s true, but is being a rent-cow for BTL landlords to milk qualitatively any the better?
Ed M is tinkering at the edges and there is not much to commend about this proposal. But I’m not sure that not taxing low wages less is really any the more convincing. And that is before we get to entirely reasonable questions about whether the poor should have a skin in the game given that all wages are in part a product of the social infrastructure, most obviously the rule of law.
For years under successive governments we have had a load of banks and inflation in the big black hole where there should have been an economy. For those lucky enough to be in the generational sweet-spot rent-seeking papered over the cracks. But ever more returns in the economy have accrued to rents and not wages. We are not going to solve anything until returns flow to wages and in a balance-sheet recession that seems unlikely. Being fair to Ed M he is at least willing to recognise the wider picture in a way that the Coalition seems oddly reluctant to.
Land value tax (and some LIMITED wealth tax) might help but then there’s more chance of me turning out for the England RL team than there is of that happening.
A C McGregor
@g: You raise a serious issue there, but it’s not an issue I think you win by giving in and accepting that the poor should be crippled by taxation. People are not just tax-cows for the state to milk, and peoples place in society is not linked to their monetary worth or earnings. To claim it is is to devalue other non-earners, such as pensioners, the disabled, students and children. What must be done is to challenge at every opportunity the awful idea that both Labour and Tories promote that people are only good for their wealth or their taxes. We must see people as vibrant individuals and not give in to the rhetoric of those who can only see people as owners or earners.
This comment about tax-cows worries me. It’s not the low paid being milked as they are more likely to be net beneficiaries of state spending. If you want lower taxation then, de facto, you must have lower state spending on health, social care, housing, unemployment benefits, public transport and so on, all things that benefit the lower paid more than higher earners.
Instead of dressing this up in rhetoric, why don’t you explain how the lives of lower earners will be improved through a reduction in the things listed above?
@ ACM- “NI is regarded as a thorny, problematic area that desperately requires reform but is going to be very difficult to do. However, there is broad consensus across the party that is not fit for purpose.”
Would you say that the simplest fix to this situation, where NIC’s have long ceased to be separate and separable from general taxation, would be to merge them with income tax?
@jedibeeftrix – 100% agree, can I plug we should also be looking to move to a LVT and making income taxes a much lower contribution to the total tax take
Helen says ‘I am proud to be supporting my new Party, the Labour Party’. Sorry Helen but you have your own party website ….an ideas free zone but all yours. Goodbye!
@ Leekliberal – perhaps you should refresh yourself of the words immediately beneath “Post a Comment”…
@John Broggio The clue is in the site name ‘Lib Dem Voice’ . It is not a forum for Labour trolls. It is of course fine for people who wish us well to be very critical of individual Lib Dem policies,
@JediBeefTrix: simply merging National Insurance & Income Tax is problematic because NI contributions determine the entitlements to some forms of benefits (although even that determination is flawed & causes huge issues due to a cliff at the receipt threshold).
You need to work out how to decouple tax earnings from benefit entitlement in a fair way to proceed. Labour have managed to tie the tax & benefit system in a Gordian knot, and slashing right through this one is politically dangerous.
“100% agree, can I plug we should also be looking to move to a LVT and making income taxes a much lower contribution to the total tax take”
sadly james, i am not a fan of LVT, all that “a mans home is his castle” lark.
To claim it is is to devalue other non-earners, such as pensioners, the disabled, students and children
Of those, though, pensioners are assumed to have paid into the pot while they were working,and children and students are assumed to be going to pay into the pot once they start working. So the issue of only taking from the common weal without giving anything doesn’t arise.
The disabled also may have paid in before they became disabled, but even if they didn’t no one is going to object to helping those who are unfortunate enough to be disabled.
So these don’t provide a good analogy to the creation of a class who are able to work, but who nevertheless only take from the common pot (and take proportionately more than others) without giving anything to it.
The author has a very short memory, as he has forgotten the Living Wage is Lib Dem policy, passed at Glasgow.
@Gareth – sorry, I missed your late comment. I would note that my post here is talking about the specifics of the Labour Policy that’s proposed, and comparing it to our own policy and extensions thereof.
I do know that F4 Section 3 passed at Glasgow calls for a review of wages with respect to the cost of living, but this piece is here to point out that given two approaches – Labour’s inherently interventionist one and our classically liberal one – the takehome pay is almost exactly the same and ours entails less bureaucracy.
@Bob – I would also point out that there’s no guarantee that someone on minimum wage now wasn’t earning taxable wages before (common in the case of Mothers who have gone from full-time to part time employment). I simply don’t accept that being taxed makes anyone part of anything.