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.

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.

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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.

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.