From today's City AM Forum (I can't find the article online yet, so I had to copy type. Please forgive any typos.)
By Harry Phibbs, a journalist at ConHome:
Hammond's virtue signalling on low wages is hypocritical
... There are alternatives the government could take that would help the low paid, and would also help reduce unemployment, rather than endangering jobs.
The first priority should be a sharp rise in the threshold for national insurance contributions.
Employees have to hand over 12 per cent of their earnings to the government on anything over £166 a week, so somebody on the national living wage working a 40 hour week has a significant tax bill [not to mention the 13.8% that the employer has to pay].
Raising the threshold would require the chancellor to find some savings in state spending. That's more challenging than just imposing a requirement on someone else and claiming the credit for it. But it would not be impossible to achieve.
Another priority to address is the Universal Credit earnings taper rate. Changing this would help make it more rewarding to be in work, rather than on welfare.
Before the Universal Credit reforms, people who accepted work really did end up with less money. This is no longer the case, but the taper rate means that for each £1 earned, 63p in benefits is [sic] lost. That is simply too steep a taper. After all, the Laffer Curve applies to the poor as well as the rich, so reducing the taper would reward work just as tax cuts do.
There is something awfully hypocritical about Philip Hammond and the government decrying "unacceptable" levels of low pay by employers, then grabbing a chunk of a salary so that it is even lower when it finally gets to the employee."
I've been saying all this for over a decade, but it's reassuring when others say it. The 67% overall marginal rate on wages over £100,000 a year* seems too high too me, but far less troubling than the 80% or 90% overall tax/taper/withdrawal rates faced by people on wages up to £20,000.
* Do the maths, this is mentioned even less often.
Put On Your Big Boy Pants, Maybe?
1 hour ago
26 comments:
It is widely accepted by the section of the population who are blessed with an IQ somewhat greater than their shoe size that Philip Hammond is an utter pillock.
TT - Agreed. In Spades. Doubled.
MW. This whole benefits trap farrago has got to be sorted out.
Do tax credits disincentivize working extra hours or taking a higher pay job in this kind of analysis.
TT, I'm not a fan of his politically, but compared to Brown, Darling or Osborne, who tried rewriting all the rules every six months, Hammond makes life a lot easier for tax advisers and accountants because he doesn't tinker very much.
L, yes but when and by whom? Labour love complicated as it means lots of bureaucrats to pry into people's lives to separate the Deserving from Undeserving Poor. The Tories love complicated as it means they can torture and persecute the poor, who in their eyes are all Undeserving.
JH, not to me, and not to far more prominent people either.
Din, yes. The overall withdrawal rate is still savage. Who expects people to take a £10/hour job with a marginal withdrawal rate incl. PAYE of 80% or £90%?
The incidence of all labour-related taxes is on the employer, regardless of who is nominally responsible for making the payment. This includes PAYE Income Tax and "Employee's" NI contributions. They are functionally equivalent to a payroll tax. It would make no difference if they were rolled up into a single tax charged directly to the employer, based on the aggregate payroll.
From that point the tax is passed on to customers if possible, or absorbed in lower profits; in turn, this depresses rentals, thereby demonstrating the ancient observation that taxes come out of rent.
The LVTC website used to publish "Employer's Burden" every year but this has not been done since 2013.
http://www.landvaluetax.org/current-affairs-comment/employers-burden-2013.html
> Physiocrat
That is not right . If the employee is being paid the minimum wage then yes any other employment expenses are on the employer. But for a wage higher than that figure, when the employers are competing to attract the employees, then the employers are paying the most they can afford to secure that contract with the employee, and what they can afford is lowered by labour taxes, they reduce the wage, and the incidence is on the employee.
@Dinero
Wages are the minimum a worker will accept to do the job. Real wages are the goods and services actually available for the worker to purchase ie net pay (take home), minus any sales taxes. For wages for work above the minimum level, the worker expects a differential, and the same principle applies - the incidence of the tax is on the employer. A colleague of mine never bothered to apply for promotion because after deductions, the extra net pay was not worth it in return for the extra responsibility.
This is evident among EU employees who are exempt from tax and are therefore willing to accept lower gross pay, since their net pay is the same as when working for an employer where they would be liable for tax.
> Physiocrat
Above the minimum wage, the higher wages including Paye are the minimum they are prepared to accept because the employers can afford to pay them more, and they will choose the employer who pays that sum and that sum includes the sum that then becomes Paye. The incidence of the tax is on the employee - as Landlords that rent land that is in demand do not pass on land taxes to tenants, also employees that rent skills that are in demand do no pass on PAYE to employers
The higher paid worker would be happy to accept his real wage in return for the value he adds by his labour, which may be hundreds of times more than that wage. The PAYE must be paid by the employer - it is, legally, the employer's liability - and comes out of the employer's profits. PAYE Income Tax is functionally identical to a payroll tax and is in reality the government's share of the production of the business. One of the problems is that it is a tax on the business, levied regardless of the employer's ability to pay. Another is that it obscures the public and for decades has got in the way of a rational discussion of taxation. Yet another is that it encourages the replacement of labour by capital, when in reality, it is uneconomic, and yet another is that it gives rise to churning in the public sector, when the government gives money to public bodies so that it can be paid by in 'employees' PAYE, all at considerable administrative cost.
> Physiocrat
I am not being patronizing , but here is a simple scenario to illustrate that the incidence of PAYE for skills that are in demand is on the employee.
There are two building firms and one potential employee. Peter has a building firm, Paul has a building firm, Dave is a Carpenter.
Dave will go to the employer who pays them the most. And so the firm that employs Dave will be the firm that spends the maximum it can spend to fill that post. From that sum of money that the employer can spend PAYE is a reduction of that sum and therefore it is shown The incidence of the tax is on Dave the employee.
@Dinero
Your example is not realistic. The more realistic situation is that there is Peter's building firm and Dave and Jon are applying for the same job. Neither will take it unless their net wages are more than they presently earn. If Dave is currently unemployed, the employer has only to match the current benefit level in take-home. But Pete will have to pay the PAYE on top, even though the it is nominally paid by Dave - who never gets to see it, or the NI either.
In conditions of labour scarcity, however, eg where there are two employers and Dave is in work, both have to tempt Dave out of his present job, ie to leave him with more take-home pay than he is currently receiving. There is a ceiling to how much they will pay, because the added value of Dave's labour cannot exceed their gross labour costs, and in that situation (inelastic supply of labour) you correctly state that PAYE income tax comes out of that amount. The example is unrealistic because, except in sectors of labour shortage, this has not been the situation since 1980.
It is, however, still part of the employer's labour cost and comes out of the profits of the business, since it cannot come from anywhere else. It also promotes the replacement of labour by capital, or drives businesses to countries with more favourable tax regimes.
> Physiocrat
The case where the employers are competing to attract the skills of the employee is not the rare case, it is the prevailing case, as there are more people that are paid above the minimum wage than are people who are paid the minimum wage. As any amount above the minimum wage indicates that the employers are competing for the skills of the employee. And in those cases the tax does not effect the employers labour costs as in the absence of the PAYE the employer would still spend the same amount to attract the employee.
The case where the employers are competing to attract the skills of the employee is not the rare case, it is the prevailing case, as there are more people that are paid above the minimum wage than are people who are paid the minimum wage.
Where is your evidence?
As any amount above the minimum wage indicates that the employers are competing for the skills of the employee.
Yet one hears reports of their being dozens of applicants for a job.
And in those cases the tax does not effect the employers labour costs as in the absence of the PAYE the employer would still spend the same amount to attract the employee.
You have not demonstrated this claim. At the bottom end of the labour market ie where workers with minimum skills are seeking work for which minimum training and experience is needed, wages are determined by benefit levels and the conditions attached to them. Employers must match benefit levels in take home pay. In that situation, the incidence can only be on the employer.
At all levels above that, wages settle at a rate which depends on the demand for the skill and the difficulty and time taken to acquire that skill. Thus, doctors and airline pilots can command more pay than electricity who in turn can command higher net wages than builder's labourers.
From the perspective of the employer, the value of sales is distributed between workers (net wages), owners of capital and the government, with any surplus being economic rent. The proportion paid to government is largely rolled into the category of labour costs; it can only come from the employer's receipts since there is nowhere else it could come from.
The source being the employers revenue is a tautology without bearing on Tax incidence as tax incidence is not about the source, it is about who's net income is affected.
Evidence for MW , the office of national statistics. National minimum wage Breifing paper 2018. N.M.W. an N.L.W. "An estimated 6.9% of jobs were covered by one of the minimum wage rates in 2016"
For the lowest wage the tax incidence is on the employer. For the mandated National minimum wage you would expect that the people who calculate the MW level already take Net pay , NI and Paye into account when calculating the gross MW pay and therefore would reduce the gross MW or not increase it so much, if the NI or Paye were reduced.
For wages where the skills are in demand then the they depend on how much the employee gets of what is affordable, for the worlds best footballer all of it, for an electrician some of it. On the other hand people who stay in the same job with a firm, get pay rises. So overall at a guess Half of labour taxes are on the employee, half on employer.
Din, Phys, as a thought experiment, say the UK gets a government that decides to go for full-on LVT, replacing all taxes on labour. Would everyone get a payrise and how much of the money currently paid by the employer as tax (PAYE, NI and compulsory pension contributions) would be passed on to the employee as additional pay? Would it not be the case that whatever amount is passed on is the tax that is borne by the employee and whatever is not passed on is tax that is borne by the employer? Would it really be the case that none of the amount is passed on? This would cause much grumbling amongst landowning employees, who now would have to pay their LVT out of the same pay that they were getting after all their labour taxes had been deducted at source.
@Dinero
The gap between take-home and gross labour costs, called the 'tax wedge', was much discussed in the 1980s. There was little discussion of the true incidence of this tax.
In the long run, it does not matter. That part which falls initially on wages has the effect of cutting into domestic rents and house prices; higher disposable income ends up in residential costs, as the recent study on migration to London has illustrated. That part which falls initially on business has the effect of cutting into profits; higher profits end up in higher business occupation costs. It appears that all taxes ultimately come out of rents, which was the Physiocrats' insight.
@Bayard
If full-on LVT was introduced overnight in replacement of all other taxes, then money wages would probably stay the same initially; thus employees would receive their previous gross pay.
After a while, adjustments would take place, the most important being that vacant and underused land would be brought into fuller use, thereby creating a demand for labour. Employers would therefore find it difficult to retain workers without paying the going rate.
Higher money wages would lead to higher land values and an increasing LVT yield at each round of valuation. However, there would also be a tendency to abandon land close to the margin, which, in accordance with Ricardo's Law, also leads to an increase in wages and a decrease in aggregate rental value. On this argument, the overall effect would be to increase the share of production going to labour and capital, and decrease the share going to land, now in the form of tax. However, because the utilisation of land, capital and labour would be optimised, production would be higher and the absolute amount of aggregate rent would not necessarily be less.
In this sudden LVT scenario, the landowning employee, presumably an owner occupier, would not be pleased to discover that his retirement nest-egg was suddenly worthless, even though his income and expenses flow was improved. From that point on, however, people with surpluses would not invest them in land but their savings would be used to provide credit for investment which sustained and enhanced productive capacity. Perhaps this is what is needed to cure the UK's persistently low productivity?
I read up on the physiocrats a few years ago. I concur with accounting identity that if people have less money due to the effects of tax then rents will be lower. That may have been a true comment on the economy to the Aristocrats in the 18th century observing the kings taxation reducing the net income of their tenants possibly to spend abroad. But considering the macroeconomics now in the 21st century government taxation is not removed from the economy , it is spent in the economy 42% of spending in the economy is government spending, and is supposed to increase prosperity in the long term. For an indirect illustration consider the fact that In some parts of the country pay and thus rents mainly come from government spending.
@Dinero
Taxation removes rent from the economy. SOME government spending eg on worthwhile infrastructure and on services which would otherwise have to be paid for by consumers, returns rent to the economy; it is a form of insurance. So, yes, indeed, land rental value is substantially a yield from government spending, which is an important argument for LVT.
Other taxes result in deadweight losses (probably at least 10% of the economy, at the margin) and that the beneficiaries are not the people who pay.
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