Tuesday, 11 August 2020

Afronomics blog: "The Social Contract, Tacit Consent, and International Taxation"

I'm a little late to report on this, but earlier in the Summer I was pleased to have contributed a blog to a Afronomics law symposium : Taxation and the Social Contract in a Post-Pandemic Era: Domestic and International Dimensions

There are lots of interesting blogs on there so do check it out but I'll put a copy of my essay on here as well for completeness: 

The social contract, tacit consent, and international taxation

What do we owe our states and what do our states owe us? This is a difficult question, sometimes answered by invoking a social contract between the rulers and the ruled which implicitly sets out the rights and responsibilities of each.

Matters get even more complicated where international citizens and multinational corporations are concerned. Are they party to multiple social contracts? Or none? I will argue that if there is a social contract, then those involved in the international tax system—including tax evasion and facilitating novel forms of tax avoidance—are party to it.

The Social contract

Socrates famously chose to face death rather than exile when condemned by his fellow citizens. He felt this was his duty to his fellow Athenians, perhaps an early invocation of the idea that there is a social contract between city and citizen.

The social contract tradition is most associated with thinkers such as Thomas Hobbes and John Locke, who considered what life would be like without a state to set rules and enforce them. This stateless scenario is sometimes called the “state of nature.” Hobbes pessimistically assumed that life without a leviathan state would be ‘solitary, poore, nasty, brutish, and short.’ Locke on the other hand, felt that people would respect and enforce natural rights even without a state.

For Hobbes, a social contract to create a state was necessary to provide peace rather than war of all against all. For Locke the state was necessary because people would not reliably enforce natural rights in the state of nature. Whatever the state of nature is really like—and many such as Rousseau will disagree with both these thinkers—the point is that people would come together to create a state.

Express vs tacit consent

Perhaps there were pre-historic acts of state creation among individuals. More likely there was a gradual process of domination by some over others that over time has got us to where we are. Either way, the idea that we now are bound to the state because some ancestor of ours bound themselves is unconvincing. Their consent is not our consent.

Are there are other ways that we consent to the social contract? Voting and pledges of allegiance have been suggested, but these do not seem like reliable and universal instances of consent. If everyone is forced to do these things, then it cannot be taken as a sign of voluntary consent.

Locke believed that “nobody doubts but an express consent, of any man entering into any society, makes him a perfect member of that society, a subject of that government.” For him, then, immigrants can be said to have given express consent. If they are asked to sign an agreement, such as an immigration visa, then perhaps we can agree they have signed the social contract.

For native-born citizens, Locke felt it was enough to rely on implicit, or tacit, consent. Benefitting from the society, whether that be having “possessions, or enjoyment, of any part of the dominions of any government” is taken as a sign of tacit consent. As a result they are “obliged to obedience to the laws of that government.”

Hume’s criticism of social contract theory

David Hume presented a devastating criticism to the idea that all members of society have tacitly consented by enjoying the benefits of society in his essay “Of the Original Contract.” He pointed out that most people don’t even think about the issue, but even if they did, taking enjoyment from society cannot be a sign of consent.

Hume famously wrote:

Can we seriously say, that a poor peasant or artizan has a free choice to leave his country, when he knows no foreign language or manners, and lives, from day to day, by the small wages which he acquires? We may as well assert, that man by remaining in a vessel, freely consents to the dominion of the master; though he was carried on board while asleep, and must leap into the ocean, and perish, the moment he leaves her.

Hume also rejects contract theory in general for other, controversial reasons, and there are plenty of other criticisms of it. Nevertheless, even Hume accepts that the immigrant who settles in full knowledge of the government and laws represents the “truest tacit consent.”

To recap, we cannot rely on tacit consent providing proof that all members of a given society have agreed to the social contract. However, those who immigrate and those who have no major impediments to leaving do not have the excuse that Hume’s “poor peasant” has.

International Taxation

International taxation has received increasing attention recently, as those involved have been using the system to engage in tax abuse. These activities cost billions of dollars in tax lost tax revenue to states in Africa and elsewhere. There are various forms of tax abuse, some clearly immoral and illegal to others that are in a moral grey area. The aim of the tax abuser is to achieve ‘double non-taxation’ where they pay no (or virtually no) tax in any of the countries in which they do business. We can compare what the business would pay if it its entire operation were in a single country

My claim here is that all those involved in international taxation cannot use Hume’s ‘poor peasant’ excuse to engage in tax abuse. Elites and investors are not forced to benefit from a country. I will consider the relevant parties, using Kenya as an example state.

Multinational companies do not have to have operations in Kenya; they elect to locate there based on the benefits they expect to obtain. If they take advantage of their international set-up to evade taxation, or even reduce their tax rate by taking advantage of spurious loopholes and transfer mispricing, then they are breaking the social contract they signed when setting up in Kenya.

Wealthy international individuals similarly do not have to have investments in Kenya. They choose to engage with Kenya and are therefore bound to the Kenyan people via their contract with the Kenyan state.

Taxation professionals, such as lawyers and accountants, are also bound to the social contract. This is going to be the case if they are outsiders who are benefitting from working in Kenya, or even working with clients with interests in Kenya. However, local professionals are also going to have skills that should provide them with opportunities to leave Kenya; they cannot use the ‘poor peasant’ excuse.

Perhaps we can even add members of the local elite as well. They will often have the resources to be able to leave Kenya and would be welcomed elsewhere.

Other excuses or justifications for tax abuse?

Another Humean ‘excuse’ would be that the parties would not have considered leaving, and therefore cannot be said to be tacitly consenting. I think it is enough that the individuals have been in a position where they have made decisions about where to base themselves. This is bound to be the case for multinational companies, of course, but I think it will apply to most individuals involved in the international tax business.

A second line of excuse might be that some states are illegitimate, and it would be better not to provide revenues to governments that violate human rights. This is a compelling argument. However, I would question whether the correct response to human rights violations is to extract wealth from the state. This is not going to make the situation any better. The benefits from tax abuse could be placed in a trust fund to be used to support a future legitimate government. It certainly cannot justify making profits from the state.

What does the state owe?

The social contract is between the state and the people. The state is a supra-human entitle of course, but certain individuals have responsibilities to ensure that the state honors the contract: the head of state, members of government, and high-ranking officials.

They owe the citizens protections from external threats, but also internal ones as well. If the state is illegitimate, as mentioned above, then the social contract is broken. In this case, the international investors should boycott the state, or at the very least engage only in ways that benefit the people of the state and not their oppressors.

My focus here is on international taxation, and in this regard, officials should be looking to ensure that their citizens do not lose out from international taxation. Officials should view tax abuse as a threat to the citizens of the country, and certainly not an opportunity to exploit for personal gain. My focus here is on the other parties, however.

What do citizens and international investors owe?

I expect one main response to my argument will be that the social contract only requires people to follow the law. If those involved in international taxation do follow the law, what is the problem? If they break the law, then they are subject to legal sanction, and rightly so. But does this cover all cases?

In some cases of tax abuse, the law is broken but the state does not realize because those involved hide the situation. However, this is to say that some people who claim this defense are acting in bad faith. Of course, it would be wrong for states to punish those who have not broken the law. However, this does not mean that all those who have not been found guilty have done nothing wrong. They should not fool themselves or the rest of us.

The deeper complaint is that those involved in international taxation should not be actively seeking to enable tax abuse which robs states of revenue in the first place. Hopefully, professionals will already inform the authorities of any wrongdoing, and also inform the government and civil society of any new loopholes.

Multinational corporations might take the position that they have competitors who will be seeking out international tax advantages, meaning that they need to as well. There is no room for expensive do-gooding in the corporate world; do-gooding companies will just get taken over by more ruthless rivals. The international corporate world is akin to Hobbes’ ‘state of nature.’

However, companies and their agents can respond to this situation in two ways. Option one is to advertise that these loopholes exist, to express that they are a source of great regret and that they should be closed as soon as possible. Option two is to quietly take advantage of the loopholes, and to seek out new ones. To seek to empower low-tax and secrecy jurisdictions and to undermine attempts to clean up the system. Option two does not seem compatible with the social contract to me.


Political obligation in general has come under fire from philosophical anarchists, and I have not responded to those objections here (though I remain unconvinced). There are also other theories of political obligation as well as consent theories. But even if tax abusers claim to be philosophical anarchists, I would argue they should avoid engaging with states (perhaps basing themselves in stateless areas of the world) rather than seek to gain from investing in them.

I have not considered all the arguments against consent theories—I have focused on Hume’s early criticism of the social contract. My argument, therefore, is a conditional one. If there is a social contract, then certain participants in society are clearly party to it. This will include those in a position to engage in tax avoidance and evasion using the international loopholes.

References (all accessed 24 June 2020)

Dagger, R. & Lefkowitz, D. "Political Obligation" The Stanford Encyclopedia of Philosophy (2014).

Locke, J. Two Treatises on Government [1688]

Hobbes, T. Leviathan [1651]

Hume, D. “Of the Original Contract” from his Essays: Moral, Political, and Literary [1751]

International Bar Association, Lipsett, L. and Cohen, S. B. Tax Abuses, Poverty and Human Rights (2013)

Plato Crito [399BCE]

Rousseau, J. J. Discourse on inequality [1755]

Monday, 30 March 2020

Hourly Averaging videos!

For years now I've wanted to create videos about my hourly averaging system, but never got around to it.

Well, the current coronavirus outbreak has spurred me on to get on with it.

I've made three to begin with but I might make more depending how things go. Making them has been a welcome distraction!

Do let me know what you think of them and let me know any ways I can explain it more effectively.

You Tube provides automatic subtitles, and these can be translated into other languages.

This would be particularly relevant for the third video in which I talk through illustrative examples. I underline various numbers in the tables as I talk about them, so this would accompany the

However, if anyone would like to have a copy of the slides in order to create versions in different languages do let me know!

Monday, 23 March 2020

How to fill an empty stadium with atmosphere

These are challenging times.

Sport has understandably been postponed as events with large crowds are discouraged if not outlawed.

Some have discussed continuing without spectators. This still risks transmission among the players and staff. However, perhaps it might be considered safe enough in a few months time.

Let’s say that behind-closed-doors sports are deemed safe but spectator crowds are not for some time. Here is my proposal:

Sports with Live Fan noise
Live music venues and support companies all around the world are struggling without any business.

Image “SCAPE” by Jaanism

There is lots of high quality PA equipment and technical experience going unused. Why not divert these to stadiums and pipe in the crowd noise to generate an atmosphere?

Where will the noise come from? The sound can come from the fans at home. Most viewing devices have microphones built-in or have a port into which to plug one.

Teams can offer their fans the option to pay for a high-quality premium feed. Those with the premium live feed could have their feedback sounds piped back into the stadium and played on the loudspeakers.

Fans could start up their old chants, cheer when their team does well and contribute to the experience as they used to. People at home might cheer much louder if they know the players and their fellow fans will hear them!

As well as additional loudspeakers placed throughout the stadium, it might be possible to hook up the existing speaker system to give an ever fuller sound.

The away teams could be given a less powerful array of speakers than the home team in order to ensure there is ‘home’ advantage.

Sports clubs would get revenue from the premium feed as well as revenue from broadcasting the games on TV or on the internet using a secondary feed.

Games could be played in a staggered way so that those without much to could watch games on the secondary feed quite a lot of the time if they are bored.

Potential downsides

There are a few things to work through.

One is the latency and delay in the feed. The whole thing would only work if the visuals and audio coming back were reasonably in synch. Too much of a delay and it be bizarre for players and fans alike. Certainly singing songs won't be possible if everyone is a few seconds out of synch from others. Hopefully by prioritising a paid premium connection getting this feed the ‘feedback’ sound would be quick enough. Maybe singing wouldn't work but cheering could. The secondary feed could of course be allowed lag without any problem.

Another is that it might be strange for the players. They will be ‘playing for the cameras and not the crowd. But who cares? Lots of football (soccer) players run to the cameras to pose for those watching when they score anyway!

A third concern is that some people might during quiet moments shout obscenities. This can happen at regular televised games of course, and hopefully the system can be designed to filter out unexpected noises (like someone new coming into a quiet living room and shouting).

Huge upsides

People miss the Camaraderie, belonging and just the distraction of sporting events. We could all do with something a bit ‘normal’ in our disrupted lives.

Watching sports teams play is much better when there is crowd noise.

I think it would be worth trialling at least, when it is possible to do so.

It would be particularly good for tennis; the crowd noise can be muted leading up to the serve!

Stay safe everyone and keep helping one another get through this!

Friday, 20 March 2020

Coronavirus response: Government secondment proposal

There is a lot of discussion about how to respond to the economic issues generated by the Covid-19 outbreak.

Governments have affirmed that they will make money available

In my previous blog I argued that a targeted job guarantee scheme would be an untargeted UBI.

Helping firms or helping the unemployed? 

A lot of firms, particularly those whose customers sit in close proximity, will be under pressure to survive an extensive period of social distancing and/or lockdown.

We will need these firms when things go back to 'normal' in the medium term. If they go bust this creates huge economic uncertainty. The people who lose their jobs will have short and long-term problems to add to their existing concerns.

Some think that bailing them out is just going to transfer money to reckless business owners and shareholders who took profits out for their own benefit but didn't plan for a rainy day. Isn't capitalism about letting the weak go to the wall?

Given the social and economic disruption we should probably help businesses, though not write them blank cheques.

Government Secondment

Building on my flexible job guarantee proposal I think government should also offer to 'second' staff from struggling firms in affected industries.

Government should pay the companies up front to take control of their temporarily unnecessary but still costly workers.

What could the seconded workers do?

There are loads of things!
  • Stay home! Those with health conditions can be paid to isolate.
    Others can be paid to stay at home, perhaps being assigned a 'reserve' occupation and being taught skills in this occupation remotely 
  • These reserve and part-time occupations (with full-time pay) can be: Cleaners of public spaces, hospital support staff, supermarket staff, warehousing, farming, logistics, take-away deliveries. 
  • They can no only cover and assist government staff but also be provided at no cost to private employers which have a crucial role but which have lost many staff to sickness and precautionary self-isolation. Essentially, this means backfilling jobs in key industries (healthcare, food delivery) where staff there are sick or self-isolating.
  • Look after children off school. Those with children could be paid to stay home with them. Given advice about what to do. Teaching children is hard. 
If the secondees show any symptoms they should be told to stay home on full pay.

This would give employers a break in proportion to the impact on their business. It will cover one of their main (almost certainly their main) ongoing cost.

However, it doesn't provide employers with a blank cheque or prop up failing or irresponsibly run businesses.

Saturday, 14 March 2020

Virus response: Guaranteed jobs or Unconditional Income?

Advocates of two radical ways to improve lot of the working class will advocate their preferred solution as a solution to the current virus crisis.

They are particularly relevant because self-isolation (whether voluntary or unenforced) will have a huge impact on some industries; hospitality and tourism in particular. If these industries employ a lot of precarious workers then they will reduce their hours or let them go. Some precarious workers may find themselves without sick pay while they recover or self-isolate. 

Job Guarantee (JG) or Universal Basic Income (UBI)? 

I tend to be in the job guarantee camp, but I think a job scheme that guarantees income but not hours of work is the best option in this scenario. 

What jobs can be done? 
  • Providing a food and goods delivery service for the needy and those self-isolating is one obvious possibility.
  • Supporting medical staff. Hospital portering, helping to transfer samples for testing, transferring equipment etc.
  • However, I think a really useful thing would be to clean public spaces. Having an army of people going around cleaning handrails in busy locations and public transport for short periods each day could be very useful. 
The response may be that during the virus outbreak, it is sensible for people to spend as little time in busy public areas as possible.  

This seems to push towards the UBI proposal but I think it actually pushes towards an alternative form of JG. 

I would suggest spreading this extra work around between the people who have lost their work rather than an indiscriminate UBI for all. 

Rather than hire a few extra people to do the above jobs full-time (or more likely no one at all), why not give lots of people a small patch to clean each day? Or a small role in the distribution network. 

Variable hours but full pay

The amount of time they spend working might vary (and they would have a lot of freedom over when to do the task--in fact they probably wouldn't be monitored). 

In effect, those in the scheme would be 'on retainer.' 

Each would be given a little to do and kept informed and prepared in case there are other things they need to do. Would it be better to have a few of the unemployed working full-time with the rest unemployed, or, a larger number in a scheme where they work as much as needed? 

I'm tempted to think that the latter would be better as spreading the work around would reduce the chance that each would get infected, and that an infected worker without symptoms would be spreading the virus around to many others. However, I'm willing to defer to the experts on that one. If I'm wrong then there shouldn't be a UBI - there should be a BI conditional on isolation! 

Obviously if participants had symptoms of the virus they would need to isolate themselves and should be given a generous compensation (if not quite the same amount as those who make themselves available for the project). 
In person or arms length?

Normally for a JG proposal I would suggest that anyone could show up at the employment office in the morning and wait to be assigned a task. 

With the current virus that would be a terrible idea. Therefore, the system would have to use technology - phone and, for the most part, internet-based training and instruction. 

For simple jobs, these can be done at arms length, meaning that the programme, if well planned wouldn't require people to gather in one place. Materials could be dropped at each person's location, or they could collect them from a safe point. 

Why not just hire more people and give others a UBI?

UBI advocates might argue that those who are isolating could buy services (thus creating work) and the otherwise unemployed with the UBI could organise themselves into charitable enterprises  

The problems with UBI are that 
  • it isn't targeted on the most appropriate people (in this case the self-isolating would be better off with generous sick pay, the benefit payments should go to those who have lost their precarious work) 
  • it doesn't encourage productive and organised use of people's time 
  • it doesn't provide people with a feeling that they are contributing/doing something useful 
Because UBI payments go to everyone you would not be able to provide as much to the above group as you can with a targeted programme. It would be giving money to the person who was going to stay home anyway. And maybe to the person who is going to go out and spread the disease. 

Further problems with applying UBI, relying on private enterprises and public charity

Will businesses go around hiring new people in the future? They might not want to take the risk on a hiring process. 

We could give people a UBI and hope they will organise charitable activities. Some have already started to organise themselves in this way. Good for them. 

I tend to think a centralised scheme will be more effective as it will be more organised. But also it can call on all sorts of additional resources - the infrastructure of the state and the army of people who might be willing to help a) if they receive pay or b) if they receive direction.  

Advantages of creating an 'anti-virus army'

There are many advantages to creating a reserve army out of those who have lost their jobs as a result of the virus.  

One is that those engaged in the task will feel they have contributed. They will have a positive role to play in society, given that their previous role may be lost for the time-being. Morale could be a big problem if jobs are lost and the future seems bleak. A smaller UBI payment wouldn't improve morale in the same way. 

And they will be able to contribute. They can be taught about best practice to keep the virus at bay and can help to put that into practice, teaching others as they go. They will be a visible sign to others that there is an organised response. 

I think that governments need to organise a highly co-ordinated response to the virus. Private providers and charities might not be able to cope or organise themselves effectively. 

An arms-length job guarantee scheme is a positive response which provides income, knowledge and a chance to contribute to those who suffer most from the economic storm. Giving out money in other ways likely to bleed the benefits to all sorts of other groups who are less badly off. 

Generous payments to those who are isolating for heath reasons and generous payment to those who find themselves involuntarily unemployed and willing to join the anti-virus scheme is superior to providing a smaller amount of money to everyone whether they are in either of these categories or not. 

As I say - I think UBI advocates should really be advocating some kind of 'conditional isolation payment' if they are going to argue that the state should be paying people to stay at home. UBI might seem like a good idea in response to the virus but it might not actually be the best one.

Update on 15 March

Governments are organising a concerted effort to support the economy through interest rate drops (not that they could go much lower without going negative) and a Quantitative Easing programme.

Rather than support capital owners, the focus should be on helping the precariously employed who will lose their jobs.

Train companies are asking for a bailout as they have lost business. However, it seems that train companies take profits when things go well, why should the government fully underwrite their risks? Perhaps the govt. could pay them extra for train cleaning services but otherwise should consider nationalising the railway firms for the time being.

Deliveroo vs. Job scheme
There are lots of unconfirmed briefings about the future plans in the UK. One suggestion was that anyone over 70 would be asked to remain at home and would get food delivered by the likes of Deliveroo and Uber Eats. This is a terrible idea. These apps use precarious labour and the chance of spreading the disease would be much greater if deliveries are undertaken by people with poor employment terms and no sick pay.

Not to mention the fact that these firms don't operate outside big cities - they don't exist in my small town for instance.  

Tuesday, 11 February 2020

Philosophers utilising hours

Sometimes I notice political philosophers mentioning things like hourly pay that play a prominent role in my hourly averaging proposal.

I thought it might be useful to list these. Perhaps I should make a similar list regarding economics too.

Rawls and Pogge

Reading Thomas Pogge's Realizing Rawls (1989) prompted this blog. He mentions leisure as a good at several points in the book. I particularly noted the following table, which considers economic systems with different hourly tax rates to illustrate his discussion of Rawls' difference principle.

Pogge here considers how many hours people with different hourly incomes would work if they faced different levels of tax.

Rawls himself discussed leisure-time after being challenged by economists. He then added leisure-time to his index of primary goods. In Justice as Fairness Rawls notes that leisure-time can be added to the index of goods much more readily than native endowments and states of consciousness. He writes (p179) that "leisure-time has a reasonably objective measure and is open to view."

Pogge (1989, p198-9) writes "the index must also include leisure time as a distinct social primary good...Leisure time must play a role in interpersonal comparisons through which the least advantaged within an existing social system are identified. Even though their annual or lifetime income is rather low, those who choose to do only a few hours of well-paid work each week cannot plausibly be considered less advantaged than others who work many more hours per week in a lower-paying job."

Marxist economics

Marx developed a theory of surplus labour value from the pre-existing labour theory of economic value. Time spent working has a key place in this theory, since workers effectively have part of their working time stolen from them each day by their employer.

I'm not convinced by theories of economic value of this kind, and Marx's position isn't really the type of thing I'm interested in here. Nevertheless, I felt it should be mentioned that hours and working time do play some role in this approach as they have historically pushed activists to consider the issue. 

The Distribution of Time 

Other authors have considered how to conceptualise the distribution of time in society. Bob Goodin's Discretionary Time and Julie Rose's Free Time consider whether people have insufficient time available to them; time in which people have autonomy or over which they have freedom.

People's wage rate will influence how much free time they have. Hourly wage rate plays a part in determining someone's dicretionary time (Discretionary Time p43-5) and their free time (Free Time p40). One of Rose's illustrations contrasts people with differing hourly rates, and the difference this creates between them.

The focus of these works is different, but within the realm of work, different hourly wages will make a difference to the time they have available.

Endowment, Talent and Economic Rent

Other authors mention hours worked and hourly income when discussing the ideal form of tax or income.

Socialist philosopher G.A "Gerry" Cohen, for instance, argues that people should be paid the same per hour, unless they have a particularly onerous job. He says as much in Why Not Socialism? (around page 19-20). He writes that "under socialist equality of opportunity income differences obtain when they reflect nothing but different individual preferences, including income/leisure preferences. People differ in their tastes, not only across consumer items, but also between working only a few hours and consuming rather little on the one hand, and working long hours and consuming rather more on the other. Preferences across income and leisure are not in principle different from preferences across apples and oranges." So /leisure/work choices can lead to different levels of consumption even in a socialist utopia.

Stuart White in his book The Civic Minimum (p79-83) considers people's responsibilities to contribute to society in accordance with his "egalitarian earnings subsidy scheme." This determines people's pay with regard to their endowment, but also the number of hours they work. The approach is designed to get around some of the most troubling aspects of endowment taxation, and while it gets around the worst aspects of endowment taxes, it does not get around all of them. While White presents his subsidy as applying for each pound the person earns, my proposal is to apply the subsidy for each hour the person works (if their lifetime average is low).

Kristi Olson's paper "The Endowment Tax Puzzle" advocates a tax on economic rents and uses hourly income to illustrate the various cases she considers. Olsen argues that both endowment taxes and earnings taxes fail to distinguish between income based on economic rents to talent and earnings from other sources.

I believe my hourly averaging scheme gets closest to capturing the rents obtained by high earners, without requiring knowledge of people's endowments and setting of tax-rates accordingly.

Olson writes (p270) "Part of this problem could be alleviated simply by altering the current tax system to take into account not only the individual’s total earnings, but also the individual’s hourly earnings, such that individuals with lower hourly earnings would be taxed at a lower rate." 

Essentially, Hourly Averaging offers a way to put these suggestions into practice as well as can be without taking account of endowment (which could lead to a "slavery of the talented").


I have argued that hourly averaging is attractive from a broad egalitarian perspective, as an attractive hypothetical insurance choice, and that it can be appealing to non-egalitarians too.

Perhaps if the above authors had known of my proposal they could have invoked it as a close approximation of their own ideal.

It is also worth mentioning that the thinkers above mostly do not advocate a Universal Basic Income, but rather argue that income should track, however indirectly, the number of hours someone works.

Friday, 24 January 2020

The difficult case of the Greggs bonus

Another row has developed about the flaws in the Universal Credit system. This time after purveyors of pasties and sausage rolls (vegan or otherwise), Greggs, kindly decided to pay all of its workers a £300 bonus.

Some workers in receipt of Universal Credit would receive as little as £75 of the £300 bonus, an effective tax rate of 75%. Others get a higher proportion of the bonus, but still face a bill higher than the average tax-payer despite being badly enough off to qualify for benefit payments.

Obviously low-paid workers shouldn't be paying taxes at this rate, and the case has generated a lot of media coverage, petitions, and various proposals, including one from David Linden MP not to treat bonus payments as income.

The Universal credit scheme has been beset with problems. It is a good idea in theory to have a joined-up benefit system which gives people an incentive to work, but it is fiendishly difficult to put this ideal into practice.

The problem in the bonus case is that it is a one-off payment. But the Universal Credit system is looking at short term income levels.

My Hourly Averaging proposal aims to do the same thing as the Universal Credit; to make work pay and assist the poorest in society.

Hourly averaging, however, would have no difficulties with the bonus issue. Each person has a tax-rate determined by their lifetime hourly income. A bonus of £300 isn't going to affect that lifetime calculation very much, and so the recipient will receive whatever percentage of the bonus they get for the other work they were doing. Someone whose tax-rate is 0% will receive the whole lot. Someone with a 25% will receive £225 and so on.

Low earners would never face a high tax bill on a small bonus because their lifetime hourly average will be low. There could be exceptions; someone who works in a low-paid job but who received a huge inheritance could conceivably have a high tax-rate, say 70% on their bonus. But that is because they are genuinely fortunate--they have gained much more than their fellow workers, in this case because of their inheritance.

As so often, when there is hand-wringing about the tax-system or benefit system it occurs to me that hourly averaging would do it much better.