Merryn's Blog

Tax breaks for higher wages won't work

Ed Miliband's suggestion that the government coax companies into paying higher minimum wages completely misses the point, says Merryn Somerset Webb.

I have written here many times about the lunacy of our current welfare to workers system, where companies pay their workers so little that the taxpayer, via the welfare state, ends up topping up their incomes (and, effectively, company profits).

A conversation now appears to have started on this there have beencalls for rises to the minimum wage based on this reasoning in several places recently. And last weekend, Ed Miliband even made a contribution to the debate.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

His big idea is that, rather than force companies to pay a living wage, we gently encourage them by offering them tax breaks. So if a company pays what he apparently considers to be enough (the living wage - £8.55 in London, £7.45 everywhere else), they get paybackthrough various tax reliefs, or lower levels of business rates.

I can see what he is thinking here, but I am not sure it takes us much further.It doesn't stop the taxpayer subsidising corporate wage bills, it just tweaks the transmission mechanism: whether the money is paid directly to the worker by the state, or to the company to compensate them for handing a similar amount of cash to the worker, is entirely by the by.

Advertisement
Advertisement - Article continues below

It is also worth noting that £7.45 an hour (or just over £15,000 if you work 40 hours a week most weeks of the year) is unlikely to be enough to move the vast majority of current tax credit etc recipients out of welfare to work anyway.

Finally, I suppose we might as well point out that this policy is entirely unworkable. How are we to figure out which companies are deserving? Some companies pay everyone more than the minimum wage already. Are they suddenly to get a tax break for doing what they do already? Some pay some high wages, and some low wages. How do we judge them? And new companies how do we prejudge their right to a tax break? And aren't these tax breaks anti-competitive?

It isn't as easy as you can make it sound in a speech. What we need most in our tax system is fewer transfers and more simplicity. Miliband's plan offers exactly the opposite.

I am entirely uncertain as to the best way to deal with the ludicrous merry-go-round of money from taxpayers to workers (although a large rise in the minimum wage is the easy answer). But I am certain that it isn't right for people in full-time employment to be paid so little that their survival has to be subsidised by the rest of us.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019