·         The government should raise the tax-free personal allowance to the National Minimum Wage rate to achieve a ‘Living Wage’ for all workers.
·         A NMW hike would lead to more unemployment among young and unskilled workers, but a tax cut would have stimulatory effects.
·         By raising the tax-free threshold and pegging it to the Minimum Wage level, up to 1,297,000 workers would be lifted out of taxation altogether. 1

In a paper released today (Monday) at the start of Living Wage week, the Adam Smith Institute calls for an alternative reform to increase net wages of low-paid workers. It argues that although the Living Wage Foundation’s efforts to increase pay for low-paid workers by working with employers should be applauded, it should not lead to an increase in the minimum wage, which could price low skilled workers out of the employment market altogether.

The paper reviews academic studies of minimum wage increase and argues that an increase in the National Minimum Wage to reach the Living Wage level would endanger employment prospects for low skilled or young workers. The paper argues that the unemployment effects of the minimum wage, whereby the minimum wage acts as a price floor that keeps unproductive workers out of employment altogether, make a rise in the National Minimum Wage too risky to consider.

Instead, the focus should be on the net income, not gross income, of workers. The pre-tax minimum wage is actually greater than the after-tax Living Wage – in other words, the only thing holding back all NMW workers from earning a Living Wage is tax. To address this, the tax free allowance should be raised and pegged to the National Minimum Wage rate to lift the lowest paid workers in the UK out of taxation. Raising the personal allowance to £12,875 would increase the take-home pay of everybody earning under £100,000 by £575 and lift up to 1,297,000 people out of the tax system altogether.

Author of the report and Adam Smith Institute’s policy director, Sam Bowman, says: “It is a national scandal that we tax the people at the bottom of society so much that they can’t earn enough to achieve a basic standard of living. It makes no sense to say that the National Minimum Wage is the least a person should earn and also take away a large chunk of that in tax.

“A tax cut for the poor and middle in this time of low economic growth would be just what the doctor ordered. It would increase spending and repayment of private debt, and relieve some of the burden on the people who can least afford to pay. Taking the poor out of tax makes economic sense, and it is also one of the most compassionate things this government could do for people at the bottom of society.”

1. This statistic comes from data in Low Pay Commission Report 2012, p38. You can read the report here: http://www.lowpay.gov.uk/lowpay/report/pdf/8990-BIS-Low%20Pay_Tagged.pdf

· Just Rewards: Why taking the poor out of tax makes economic and moral sense is a report released by the Adam Smith Institute. You can read the full report at: http://www.adamsmith.org/sites/default/files/research/files/JustRewardsASI.pdf