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 - 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.




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

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

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020

Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020

Most Popular


Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020