New ASI Report: Scrap mandatory National Living Wage, slash taxes on low-earners instead

For further comments or to arrange an interview, contact Deputy Director Sam Bowman: sam@adamsmith.org | 07584 778207

• Instead of imposing a mandatory National Living Wage, the Chancellor should take minimum wage workers out of tax and National Insurance, giving workers a similar level of post-tax income while avoiding the 60,000 higher unemployment and £1.5 billion lower GDP that the Office for Budget Responsibility predicts will accompany his plans.
• Even if the minimum wage for the over-25s is increased to £9/hour under the current tax system, take home pay will be only 69p/hour above the untaxed level of the 2015 minimum wage. This difference will become even less significant considering planned increases in the minimum wage in the coming 5 years.
• Without tax, working 37.5 hours a week on the minimum wage would bring workers to within 5% of the living wage.

Instead of imposing a mandatory National Living Wage, the Chancellor should give minimum wage workers a ‘living wage’-level income by slashing taxes on low-paid workers, according to a new paper from the Adam Smith Institute.

The paper, Abolish the Poor: How raising the Income Tax and National Insurance thresholds could give everyone a living wage, shows that income tax and national insurance contributions from low-paid workers are significant causes of in-work poverty, and argues that raising these thresholds to the full-time minimum wage level would bring minimum wage workers’ incomes to within 5% (up to 32p an hour or £670 a year) of the living wage.

This would avoid the 60,000 job losses and £1.5 billion hit to GDP that the Office for Budget Responsibility predicts will accompany his plans.

Even if the minimum wage for the over-25s is increased to £9/hour under the current tax system, take home pay will be only 69p/hour above the untaxed level of the 2015 minimum wage. This difference will become even less significant considering planned increases in the minimum wage in the coming 5 years.

The paper, written by ASI Senior Fellow Tim Worstall, also illustrates that in-work benefits are not a net subsidy to employers of low-wage employees, except to the extent that they attract more people into work. Economist Jesse Rothstein found that $1 of Earned Income Tax Credit (the US tax credit) spending results in $0.74 in higher wages to the recipient. This doesn't imply an $0.26 benefit to employers, however – if wages have only fallen because more people have entered the workforce, the ‘lost’ sum may be spread among other workers.

Employer-side national insurance contributions, which tax employment, also fall partly on workers’ wages and partly on job numbers. If the government truly wants to raise wages and improve the labour market at the bottom end, it should consider reducing their rate, increasing the threshold at which they kick in, and eventually scrapping them altogether. They are a pay-destroying stealth tax on workers.

Senior Fellow at the Adam Smith Institute and author of the report, Tim Worstall, said:

If we want to kill working poverty stone dead then all we've got to do is stop taxing the working poor so much.

The simple truth is that the difference between the current minimum wage, which it is said still leaves people working full-time in poverty, and the living wage which would take all of those working full-time out of poverty, is the incredible, unconscionable, amount of taxation upon incomes that we charge to people with those low incomes. By simply raising the national insurance and income tax allowance to the full year, full-time, minimum wage we can rid ourselves of this problem.

We may or may not take those who campaign about relative poverty to heart but why not take them seriously for a moment? If that living wage is all that is needed to entirely abolish working poverty in this country then the solution is in the hands of the government. Simply stop taxing those who make low incomes. For the truth is that we do not have low wage poverty in the UK, we have tax poverty.

ASI Head of Research Ben Southwood added:

There has been a lot of bluster around tax credits—the government and others have claimed that they 'subsidise' employers. But it's more true to say that employers 'subsidise' the government by taking on low-productivity workers and reducing the benefits bill for the government to pick up. Would the government rather they were in work?

Abolish the Poor is a timely reminder that we should look at evidence before we make ad-hoc eyeball judgements. Economics is complex and surprising and we cannot jump to conclusions.

Notes to editors:

For further comments or to arrange an interview, contact Deputy Director Sam Bowman: sam@adamsmith.org | 07584 778207.

To access the full report Abolish the Poor: How raising the Income Tax and National Insurance thresholds could give everyone a living wage, click here.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Charlotte Bowyer gives a post-Budget reaction on Sky News

Head of Digital Policy at the Adam Smith Institute, Charlotte Bowyer, spoke to Sky News about the Chancellor's emergency Budget.

ASI Budget Reaction features in The Guardian and The Herald

The Adam Smith Institute's Budget reaction has featured in The Guardian and Herald Scotland. From The Guardian:

Interestingly, the strongest opposition to the plan came from the free market thinktanks: the Adam Smith Institute and the Institute of Economic Affairs. The CBI wasn’t all that keen either. Its director general, John Cridland, said the government was getting pretty close to setting an overtly political mandate for the Low Pay Commission. “That’s not something I welcome,” he added.

Both the ASI and the IEA would have preferred Osborne to tackle the low pay issue in a different way. They would have preferred deeper spending cuts to fund bigger reductions in taxes. And they would have liked a more radical reform of the tax system, with moves towards the harmonisation of income tax and national insurance. Raising the level at which employees start to pay NI towards the level of the income tax personal allowance would, they argue, do more to help the low paid than a compulsory increase in wages that the Office for Budget Responsibility estimates will cost 60,000 jobs.

Read the full article here.

To read our reaction in the Herald Scotland, click here.

ASI Budget Reaction features in City AM and The Telegraph:

Deputy Director Sam Bowman has written on the impact of the Chancellor's new living wage on employment for CityAM.

There is lots of research into what the minimum wage does to jobs. Of the 103 papers reviewed by economists David Neumark and William Wascher in a 2006 study, most of them showed that raising the minimum wage reduces long-term employment. Of the 33 most methodologically robust studies, 28 (85 per cent) demonstrated this.

The Office for Budget Responsibility estimates that the new living wage will see 60,000 job losses and a £1.5bn cost to the economy overall. This will be among over 25s, who may be their families’ main breadwinners. Until now, the Low Pay Commission has raised the minimum wage very slowly to avoid job losses, and it has often been very restrained in doing so. Those days are now over.

The people who point out that 1997’s minimum wage introduction did not lead to substantial job losses, without considering all the other evidence, are embarrassing themselves. Based on the evidence, there is a consensus: minimum wage hikes cost jobs.

Read the full article here.

Director of The Entrepreneurs Network Philip Salter's comments on the impact of the Budget on entrepreneurs are in the Telegraph.

Philip Salter, director of The Entrepreneurs Network, said: "The Government should leave the decision of what level to set any wage floors in the hands of the experts at the Low Pay Commission, so that business owners aren't forced to sack employees if payroll costs go up too much.

"If the Chancellor wanted to help the low paid, he should have slashed Employers' National Insurance, 70pc of which is paid for by the employees, rather than just increase the Employment Allowance from £2,000 to £3,000 a year."

Read the full article here.

Adam Smith Institute Budget Reaction: Mandatory Living Wage is a disaster

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@adamsmith.org | 07584 778207 Commenting on the Mandatory Living Wage announcement, Deputy Director of the Adam Smith Institute Sam Bowman said:

The new National Living Wage is a disaster that will condemn tens of thousands of people to long-term unemployment. Almost all of the most methodologically-robust academic studies indicate that increases in the minimum wage kill jobs. Low-skilled people, young people and ethnic minorities are the ones who are hit worst.

There is also evidence to suggest that higher minimum wages slow down the creation of new jobs, particularly in sectors that employ large numbers of low-skilled workers. Firms may also respond to this by cutting back on non-monetary worker compensation like break times and sick leave, to offset their increased labour costs.

Britain’s experience with the minimum wage has been benign so far because the Low Pay Commission’s remit has always been to minimise job losses. It has done this admirably, restraining hikes like this. This can no longer be the case.

There is no magic wand we can wave to make workers more productive. Raising the National Insurance threshold for low-income workers would have given them more take-home pay and created jobs. But that would have required spending cuts or tax rises elsewhere, so the Chancellor has taken the politically-easy way out. If the OBR’s estimates are to be believed, today the Chancellor will have put 60,000 people out of work.

Notes to Editors:

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@adamsmith.org | 07584 778207.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Kate Andrews discusses charging for missed GP appointments on Sky News

Head of Communications at the Adam Smith Institute Kate Andrews explained why charging for missed GP appointments could be a positive addition to the NHS on Sky News.

Sam Bowman's comments on Sunday trading hours feature in City AM

Deputy Director Sam Bowman's comments on the Chancellor's plan to extend Sunday trading hours have featured in City AM:

The Adam Smith Institute’s deputy director Sam Bowman welcomed the change: “Brits will be able to shop when they want, where they want. This will only be opposed by nosy moralisers who fret about other people’s consumerism. Some people enjoy shopping – get over it!”

Read the full article here.

Press Release: Scrapping Sunday trading laws would be a huge flourish by the Chancellor

Commenting on the Chancellor's plan to extend Sunday shopping hours, Deputy Director of the Adam Smith Institute Sam Bowman said:

Scrapping Sunday trading laws would be a huge flourish by the Chancellor. These laws are archaic and can be hugely inconvenient for people who rely on budget supermarkets for their groceries, who don't keep traditional working hours, or who just don't like spending Sunday evenings at home in front of the TV.

The existing laws harm retail workers by reducing the number of hours available to them to work. And getting rid of them means Brits will be able to shop when they want, where they want. This will only be opposed by nosy moralisers who fret about other people's consumerism. Some people enjoy shopping - get over it!

Notes to Editors: 

 

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@adamsmith.org | 07476 915072.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

ASI Budget wishlist: Tax credit cuts must be offset by tax cuts for the working poor

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@adamsmith.org | 07476 915072. In advance of the Budget next Wednesday, the Adam Smith Institute has outlined four announcements it would like to hear from the Chancellor:

Raise the employee National Insurance Contributions threshold

National Insurance Contributions kick in at £8,060 per year, or after just 24 hours worked per week on the National Minimum Wage. Raising the Income Tax personal allowance will do less to help the poorest workers than raising the NIC threshold, and raising the threshold will help to make work pay, particularly if the government goes ahead with its cuts to tax credits.

According to CentreForum, the cost of raising the NICs threshold to £10,000/year would be £8.8bn per annum.

Scrap the triple-lock and freeze the state pension

The pensions triple-lock means that the state pension will rise by at least 2.5% this year even though prices are not rising at all. This is unsustainable in the long-run and wasteful in the short-run. As long as cuts are being made across the board, pensioners should at least have their income frozen in real terms. Doing this would save over £2bn per annum.

Build more houses to cut housing benefit

Housing benefit spending is only so high because the cost of housing in general is so high. Building new homes of any kind will reduce the general level of housing costs, both for buyers and renters, and the government could allow this simply by rolling the Green Belt back around England’s cities.

The size of the reduction to the £25bn Housing Benefit bill would be dependent on the number of new homes built, but the government should aim to reduce the Housing Benefit bill by at least 20% over the course of this parliament, netting savings of £5bn per annum.

Revalue council tax and business rates and aim to merge them

Business rates have not been revalued since 2010 and council tax has not been revalued since it was first introduced in 1993. This means that tenants in places that are poorer than they were in 1993 and 2010 are paying relatively more than tenants in places that are richer than they were then. As well as being unfair, this is inefficient, and hurts the North in particular, with businesses there paying rates far higher than their property deserves.

As with the old Stamp Duty slab system, the council tax band system is out of date and should be replaced with a fluid penny in the pound system like rates. For both, revaluations should be done on an annual basis, revenue-neutrally. The two systems should eventually be merged at the same rate, so that the tax system does not distort where businesses and houses are located. If Zoopla can value property prices on a rolling basis, so can HM Government.

Deputy Director of the Adam Smith Institute Sam Bowman said:

There is a big danger that the cuts in next week’s Budget will be dictated more by what is good politics than what is good policy. In-work benefits are being cut without any offsetting cuts in taxes for the working poor while pensions will rise well above inflation, at a significant cost to the public purse.

The measures we have outlined would still reduce the deficit but do so in a more equitable way, so that the cuts do not fall disproportionately on the working poor.

Notes to Editors:

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@adamsmith.org | 07476 915072.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

How tax and benefits affect the poor - Dr Eamonn Butler's letter to the Independent

Director Dr Eamonn Butler's letter to the Independent on poverty and tax:

How tax and benefits affect the poor

Your graph showing that the poorest fifth of the population pay the highest proportion of their income in tax (30 June) is no reason to oppose cutting the top rate of income tax.

The fact is – as Geoffrey Howe and Nigel Lawson found when they cut the top rate from 83 per cent to 40 per cent – that rates above 40 per cent bring in less revenue, and encourage tax avoidance.

Rather, your graph is one of several good reasons why the Chancellor is right to take people on minimum wages out of tax completely, and why he must now take them out of National Insurance completely too.

Scrapping NI on low wages would more than offset the planned reduction in tax credits, and would be far simpler than paying people with one hand and taxing them with the other. It would also raise the incentives for people to get themselves off benefits and into work – which is by far the best form of welfare and independence.

Dr Eamonn Butler

Director, Adam Smith Institute, London SW1

Read the Independent's letter page here.