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The Laffer Curve applies to the poor as well as the rich

Summary:
The point being made here is that at some rate of marginal taxation folks don’t bother going to work:Buried in a government-commissioned report published this year is a clue to the reason some employers are finding it so difficult to attract British workers to lower-paid jobs.Universal Credit (UC), the author said, “can act as a disincentive” to those in the jobs market because working age people “do not believe there is sufficient reward” if they try to stand on their own two feet.It is the latest version of the so-called “benefits trap”, in which potential employees choose to stay at home, living off generous welfare payments, because working for a living would make them only marginally better off.It is also part of the reason for the Government’s current spat with business leaders, who

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The point being made here is that at some rate of marginal taxation folks don’t bother going to work:

Buried in a government-commissioned report published this year is a clue to the reason some employers are finding it so difficult to attract British workers to lower-paid jobs.

Universal Credit (UC), the author said, “can act as a disincentive” to those in the jobs market because working age people “do not believe there is sufficient reward” if they try to stand on their own two feet.

It is the latest version of the so-called “benefits trap”, in which potential employees choose to stay at home, living off generous welfare payments, because working for a living would make them only marginally better off.

It is also part of the reason for the Government’s current spat with business leaders, who see cheap foreign immigrants as the answer to all labour shortages, rather than paying higher wages to attract British workers, as Boris Johnson wants them to do.

While UC ensured that people were always better off if they work, the intricacies of the system mean that many workers are only £3.29 better off for every hour they work if they decide to enter the labour market.

Assuming an average wage of £10 that’s a marginal tax rate of 67%. £10 sounds about right for people entering work really.

This links in with the Laffer Curve of course, it is that substitution effect - effectively, it’s not worth working for that, I’m off fishing - which causes the peak tax collection as a result of the tax rate.

This telling us something important and generally not thought about much. That peak of the Laffer Curve applies to the poor going to work as well as the rich. The answer to our becoming a richer nation is therefore to lower that tax rate. Or, in the intersection of benefits and tax, the combined tax and taper rate.

This is why 15 years ago we started to say that the personal allowance should be whatever the minimum wage is - full year, full time that is. We even managed to get there except a decade late. The personal allowance today is what that full year, full time, minimum wage was in 2010 - £12,500 a year - when the point was first accepted as being valid.

Time to make that point again. The very reason there is a minimum wage, not that we agree with there being one, is that this is the minimum that someone should righteously be paid for their labour. That means that government get to keep their fingers out of that wallet just as much as anyone else. If that means the personal allowance must be raised to £18,000 a year or whatever Boris is about to announce the minimum wage is to be then so be it.

We’ll just have to have a little less government in order to pay for it, won’t we?

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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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