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.