Zoe Williams makes a good point in the Guardian when she questions why the taxpayer effectively subsidises companies like Tesco by paying out tax credits which would be unnecessary if they paid decent wages, whilst executives reward themselves massive bonuses from the profits they make as a consequence. There is clearly something wrong here.
But she only tells half of the story.
Yes, allowing highly “profitable” companies pay low wages is a scandal, but so is artificially increasing those wages by imposing income taxes on low incomes. This is effectively a dead weight cost on labour; neither the employer or employee benefits from it. It artificially raises the minimum wage which, in turn, strengthens the hand of those who would have you believe that the national minimum wage is an unacceptable burden on employers. And it undermines Zoe’s argument; that subsidy she alleges is at least in part coming out of the very low wages she is so critical of.
For this reason, it is absolutely crucial that personal allowance is raised to ensure that, eventually, no one on a living wage should be paying income tax. The coalition government has already made a start on this, and should be encouraged to move as swiftly as possible.
It would be nice to think that such a policy measure would be entirely uncontroversial; sadly it is not. In 2010, Left Foot Forward teamed up with the Fabian Society to produce a series of articles designed to prove that such a policy was one of the least fair and most regressive policies ever devised. On the narrow point about higher income earners gaining more from the policy than lower income earners, they had a point – although their manufactured outrage rings hollow in light of the new Labour orthodoxy about sticking up for the “squeezed middle”. In any case, this could e easily solved merely by lowering the higher tax rate bracket by the same amount as the personal allowance increase, which is indeed what George Osborne has done.
But it represents a wider failure of imagination on the part of Labour thinkers; that is to restrict their definition of fairness to purely one of income distribution. I strongly agree this is an important factor, but it would be a profound mistake to make this the only fairness test in public policy. Any tax policy which has the effect of making it more affordable for employers to pay people a decent wage should be championed; the public purse should indeed be used as a safety net, but it is simply madness to create a system such as the one built by Gordon Brown in which money unduly paid out on low incomes is recycled to top up the pay of people on low incomes. This is Alice in Wonderland economics – and that is even before you consider the billions in unclaimed benefits that this shockingly complex system effectively deprives people of each year. Surely even the most staunch statist cannot rationally argue against the inland revenue butting out at this point?
In short, we have a right to expect corporations like Tesco to pay decent wages to their employees – but Tesco have a right to expect the state not to have policies in place which actively discourage them from doing so. Both the government and corporate sector need to take action here, while Labour needs to decide which side they are really on.
Just a small side issue* – how is tweaking the tax bands so the less well paid get a boost, but the highly paid still get taxed not income redistribution? OK so there is a small band around between the new higher threshold and the old one who may lose out a tiny bit, but these people are at the lower end of the well off, not the squeezed middle.
And if you are within a thousand of the upper tax threshold it’s probably an incentive to get your pension arrangements in order and keep proper records of your charitable giving.
*almost on the next door playing field in fact.
I think I see a flaw. I hope this doesn’t come across as too clever-clever, as I agree with you on raising the personal allowance (and it might be dumb-dumb if I’m missing something).
If Williams is right and in-work benefits for the lowest paid subsidise the employer, it must be because the lowest paid have no bargaining power and the employer can in effect set a post-tax and benefit wage. So they can dictate X gets 8k a year, X has no choice but to accept. In comes govt, gives 2k subsidy, employer can now reduce wages to 6k. If employee had choice they would quit and go to firm still willing to pay 8k + 2k, but as they’re not, presumably they don’t.
If – if – this is the case, then does it not apply to taxes too? ie if you remove income tax, and so employee gets 1k a year extra, employer can simply lower pay by 1k?