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Home / Tim Worstall /Once more into the breach dear friends – time to sort out low pay again

Once more into the breach dear friends – time to sort out low pay again

Summary:
Polly Toynbee alerts us to one of the unfairnesses in modern life. For once we actually agree with her as well:On Monday, the “real living wage” – a voluntary scheme – is rose to £9.90 an hour outside London, which equates to £1,930 more a year than the government’s so-called national living wage (NLW).As we’ve pointed out before there’s nothing wrong with that real living wage calculation, it uses the same underlying logic as Adam Smith and the linen shirt. If the people in a society think that not being able to do - or own - these things makes you poor then in that society, if you can’t, then you’re regarded as being poor.As we’ve also pointed out, in common with the New York Times back when it knew things, the actual minimum wage is £0. We’re thus not in favour of the idea of a

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Polly Toynbee alerts us to one of the unfairnesses in modern life. For once we actually agree with her as well:

On Monday, the “real living wage” – a voluntary scheme – is rose to £9.90 an hour outside London, which equates to £1,930 more a year than the government’s so-called national living wage (NLW).

As we’ve pointed out before there’s nothing wrong with that real living wage calculation, it uses the same underlying logic as Adam Smith and the linen shirt. If the people in a society think that not being able to do - or own - these things makes you poor then in that society, if you can’t, then you’re regarded as being poor.

As we’ve also pointed out, in common with the New York Times back when it knew things, the actual minimum wage is £0. We’re thus not in favour of the idea of a legislated minimum wage any higher than that. It is though true that one exists and that’s the world we currently live in.

At which point to complain about something we’ve shouted about before. Shouted, complained, about to the extent that policy changed.

Back in 2004, 2005, however far back in the mists of time it was, when the Joseph Rowntree folks first started calculating this living wage, we pointed out that the difference between that and the legal minimum wage of the time was near entirely the amount of tax charged to those on low incomes. Every year, as both changed, we made the same calculation and indulged ourselves in making the same point. If we were to lower the taxation of the poor by increasing the personal allowance to that full year, full time, minimum wage then we would have solved the problem being complained about. The post-tax take from the minimum wage, untaxed, would be the same as the living, now real living, wage as taxed.

We wish to increase the incomes of the working poor? Then stop taxing them so damned much.

This became one of those things that took off as a political meme. One of us had significant input into the tax part of a fringe party political manifesto where the idea appeared. Our advocacy here convinced various Lib Dems including a certain Mr. Clegg - aha, aha, to the extent that they’re not or weren’t a fringe political party. The good folks at the Centre for Policy Studies worked on George Osborne and so when the Coalition came together it became policy.

Those decades of fiscal drag that led to part timers on minimum wage paying income tax were reversed. The personal allowance was raised from the £4,000 or so level up to the current £12,570. It took half a decade to get the idea established, a decade following that to get the change fully implemented. That the number is £12,500 plus a little inflation is because that’s what the full year, full time, minimum wage was when the ambition was announced.

And now we’ve all got to do it all over again. For look at Polly’s number there. £1,930 a year. As the minimum wage is currently £8.91 an hour that means the work year is being calculated as 1,950 hours (1930/99p is 1949 an’a’bit) Which looks a little high for the average but isn’t far off that average for full time workers.

OK. So, 1950 hours times that £9.90 is £19,305 for that real living wage. Given that that’s well into the top 10% of global incomes we do think that’s pretty high for a minimum wage but still. The personal allowance for income tax is £12,570. So, 20% income tax is paid on £6,735 a year - £1,347. “Employees’” national insurance starts at £9,568 so the 12% charge is on £9,737 and is £1,168.44. Everything gets worse if we include “employers’” NI which is, as we know, incident upon wages.

So we have this situation where we’re charging £2,515 in tax to those we also insist are only just making it out of poverty for a full year’s work? Further, where we could solve this simply by insisting that the full year, full time, minimum wage is what the personal allowance should be - for both NI and income tax of course.

For look at what happens. The current minimum wage is, for those working hours, £17,374 a year. The current real living wage as currently taxed is £16,790.

We do not, in fact, have wage poverty here, we have tax poverty. The problem is not the wages being paid, it’s the exactions upon them.

Or, as we said all those years ago and won in part - because we were right - and as we’ve got to shout about all over again. If we want the poor to be richer then stop taxing them so damn much.

The only even possibly logically valid argument in favour of a minimum wage - one that, as above, we don’t in fact agree with - is that it’s a moral issue. Society has decided that that’s the minimum, irreducible, value of an hour’s work and that’s that. OK then, that’s the minimum, irreducible, value of an hour’s work then and society doesn’t get dibs on a slice of that in the form of tax.

Both these numbers, the personal allowance (even, three numbers, taking NI and income tax as having different allowances) and the minimum wage are under the control of the Chancellor of the time. One day we’ll have one who does the right thing and makes it clear that they’ve all got to be the same number. The tax allowances are the full year, full time minimum wage, the full year, full time, minimum wage is the tax allowance.

Anything else is building the society on the backs of those we’ve already declared are too poor to fund it and why the hell would we do that?

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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