Tuesday, November 05, 2013

Sense on the Living Wage and Taxation of the Poorest

Tim Worstall posts on the Adam Smith Institue’sPin Factory Blog”(5 November) "Yes, it's still tax poverty, not a Living WageHERE 
So we've had the announcement of the new Living Wage rate: that level of income which allows a full year, full time, worker to earn and not be in poverty in the UK. That definition being, rightly, what people think people should be able to do and not be in poverty: as with Adam Smith's linen shirt.
That number that has been announced? 7.65 an hour.
But as I have been shouting for years that is a pre-tax number: that's the earnings before the State gets its grubby mitts on these paltry earnings of the working poor.”
I agree completely. Removing 2.5 million low-paid employees from Labour’s 10 per cent tax threshold in 2010 (Labour increased this segment of employees to 20 per cent taxation, plus they paid National Insurance on top of the tax rate) was the right thing to do, but it did not go far enough.  A wide consensus exists for the aptly called “Living wage” which still is taxed and still carries the additional “tax” of National Insurance (another inherited con grab of money from low wage earners, historically invented to "pay" for the National Health Service decades ago and never dispensed with as the NHS is largely funded from general taxation).
In Tim’s post, he also gives the figures showing that the lowest paid are deducted tax annually of £1,095, plus £1,105 National Insurance (follow the link and read the numbers).  With wages frozen to below the current and rising inflation annual increase of 1% to 1.05 and inflation in excess of 2%, the poorest wage earners are made worse off.
I’ll risk the wrath of Peter Boettke and other well-paid academics (many of them hard-line libertarians in denouncing this injustice), who probably dismiss soft libertarians like me.
As employers in the UK also pay a similar amount in their Employer’s National Insurance too for each employee they would be made better off too if such a measure was introduced.  Employee tax payments go to the government, so removing them for the ‘Living Wage’ does no affect employment because the total wage cost remains the same, and does not have detrimental employment affects, which is Peter’s and others case against minimum wage legislation.
No such economic consequence results in this reform.  Anyway for Peter’s comfort as an observer in the USA, no political party in the UK (and certainly none in the Scotland) would vote to remove the minimum legislation given the wide consensus supporting the existing legislation.
Disclosure: Tim is a Senior Fellow of the Adam Smith Institute (UK) and I am a Fellow of the Adam Smith Institute.


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