The living wage is fine as far as it goes, but the Lib Dems can be bolder

There we have it. Miliband’s big idea: the living wage. Only it is not Miliband’s idea. And more to the point it is not a very big idea. In fact, it seems to me extraordinarily unambitious.

We presently have a system in which somebody earning the national minimum wage – which for most is not sufficient to live in any comfort even before tax – and working full time pays income tax at 20% on about a third of their salary, national insurance, VAT on the goods they buy, fuel duty and road tax on the car that gets them to their minimum-wage job, council tax, air passenger duty on their budget holiday, and more.

Yet because the minimum wage in insufficient, and such a vast proportion of it is paid in taxation, the government then gives back to majority of these low-paid workers the same amount, or more, than they paid in tax through working tax credits, child tax credits, council tax benefit and housing benefit.

Who, if they were designing a wage, tax and benefits system from scratch, would come up with such a convoluted, inefficient system? (Well, probably Gordon Brown.)

On its own, the living wage would have a marginal impact in inserting a bit of sense into the system. But it is essentially just a small increase in the minimum wage, which is good but not sufficient.

A better starting point would be to abolish direct taxes on a minimum wage salary, as the Lib Dems want to do (and have already started).

Even then, though, there will be a large number of people whose net income is not enough to live on. Reducing some of the indirect taxes mentioned above would therefore help a little more.

A significant proportion of the funding for these changes can come from the reductions in tax credits and benefits paid to those now keeping more of the money they earn. And different taxes can be levied on wealthier individuals to cancel out the positive effect of reducing indirect taxes.

Still then there will likely be more to do. And this is where a higher minimum wage can be considered. But while the minimum wage so far seems only to have had a relatively small impact on unemployment, a significant increase – without other changes – clearly would make hiring people less attractive.

That is why – and this is crucial – the further savings made in the benefits and tax credits system should be hypothecated to reduce taxes on business, starting with the abolition of employer national insurance contributions. This would, to a large extent, mitigate the effects on employment of a significant increase in the minimum wage.

There is a way to make work pay and leave behind Gordon Brown’s labyrinthine tax and benefits system. Indeed, the Lib Dems have made significant steps to doing so already. But we must be bolder, because we know for sure that neither Labour nor the Tories will be.

* Nick Thornsby is a day editor at Lib Dem Voice.

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16 Comments

  • Fantastic idea. Bonus we get rid of Employer’s NIC.

  • This looks, Nick, as if you are mainly going to fund tax reductions all round with further spending and welfare cuts – not a solution that sounds very “Lib Dem” (well, only in David Laws’s private world, anyway). I think you’ll have to work a lot harder to make such a solution sound convincing, and likely to make society rather more equal!

    Of course, I may have misunderstood.

  • Nick T Nick Thornsby 5th Nov '12 - 9:35pm

    Would that be the same David Laws who specifically intervene to press for a big increase in many benefits this year? https://www.libdemvoice.org/laws-advises-clegg-oppose-tories-arbitrary-and-vindictive-benefits-cuts-25836.html

    Technically I suppose you are correct, but only if you think tax cuts and reducing the welfare bill are *always* bad things would your argument be a good one.

  • Miliband should make ensure Labour interns get the Living wage. If naming and shaming is his idea of changing society he should work in the press rather than as a lawmaker.

  • I think in the unequal state of society we find ourselves in 2012 and the tough economic times we have, yes, I would say that tax cuts and reduction of benefits overall are bad things. They may not, in all economic and social environments be bad. I also do not rule out redistribution within benefits, spending or taxes, but I think we should specifically be looking at how we can level up people’s rewards. I think it is good that the idea of “living wage” has suddenly risen up the media’s political agenda, and I am sure that is in no small part due to Miliband’s boost to it. It is interesting, with this, and with Heseltine’s ideas, you see some interventionist twitching taking place in the political forest! The trouble is, as the “new politicians”, we should have been there first.

    I do not accept, by the way, that David Laws is anything other than an unreconstructed laissez faire man. In fact the article you link refers to him in that light (as a “hawk”). I agree with the quoted views of him and IDS on the issue of benefit uprating, of course.

  • Simon Beard 6th Nov '12 - 12:02am

    When I think about removing employer NICs I can never forget that they are one of the very few, non-constitutional, Liberal policies that have actually stood the test of time, and there is a reason for that. It is an important principle that all employers contribute to the welfare of their employees, even if it is provided through the state.

    As for your other suggestions, isn’t the sollution here negative income tax?

    and budget holidays? Please, foreign travel is not a right, even the poor should pay for the environmental damage they produce by endolging in it

  • @ Tim 13

    If taxes are cut by the same amount as the benifits the indovidual is not financially worse off, however they may be better off as benifits are complex and people are often not clear what they are entitled too.

    Additionally there is a reduced opotunity for fraud and error, so even a net flat position for indoviduals are a gain for the economy (less waste).

  • @ Simon Beard

    Did it occour to you that the reason the employers NI has stood teh test of time is the voters don’t see it so it is a stealth tax and the public don’t see the harm it does to employment?

    Just because somthing has bee around a long time doesn’t make it right. If it did we should continue to have a majority of public school boys running the country…

  • “further savings made in the benefits and tax credits system should be hypothecated to reduce taxes on business, starting with the abolition of employer national insurance contributions.”

    Employers’ national insurance raises about £55bn a year. Are you sure that the savings on paying benefits would cover this?

  • Nick T Nick Thornsby 6th Nov '12 - 5:58pm

    @Matthew

    It may not do so completely but it’ll come pretty close http://m.bbc.co.uk/news/uk-politics-11466178

  • But won’t that mean a huge drop in income for the poorer paid? Removing employer NIC will give someone on the London living wage an extra £570/year. Surely all those e benefits come to a lot more?

    Actually the HMRC has data on this, I’ll look it up and get back to you.

  • Actually ONS, here http://www.ons.gov.uk/ons/dcp171778_267839.pdf

    P.15 is non retired households.

    If we take the 2nd quintile, cash benefits are £6,112, all direct taxes only £3,812.

    Now this isn’t split by working/non-working etc (but I presume most unemployed households would be in quintile 1). and maybe the IFS more targeted data.

    But I can’t believe the numbers stack up.

  • @ Matt

    But even taking the figures and imagning the “average” person from those figures, you can take £6,112 from someone and give them £3812 or you could raise the tax threshold and reduce the benifits and just give then the 2300 the they would have benifited from. The simpler system reduces theopotunity for fraud and error, as a person recieving it less of the money you recieve can have conditions on or you could be concerned that someone will come asking for it back.

    Taxing people who are recieving benefits is just a stupid idea.

  • Really great to see another piece on LDV advocating tax cuts to help the poor.

  • Tax credits = giant Speemhamland system. (look it up on Wiki – I had to.)

  • that would be Speenhamland

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