Hourly averaging, the shadow economy and mainstream work

I am pleased to announce my first blog published on the University of Manchester Policy Blog. 

I wrote a piece about the topical issue of tax credits. My argument is that a further advantage of earnings subsidies such as tax credits is that they encourage workers and employers to engage in legitimate activities and expose themselves to scrutiny. This should in turn have positive economic effects. 

I am very much in favour of tax credits. Indeed, my own hourly averaging proposal could be considered as being tax credits on steroids, given that they could be a lot more generous to working people. 

My CLIPH-rate tax proposal goes further than other proposals as it includes all personal income in the tax base. This means that all income is counted in a single tax, which is set up to provide higher net incomes to those who have worked more hours. 

As legitimate work would be a necessary condition for hour credits (and thereby legitimate net income) this would force those engaging in criminal and black market activities to create front businesses to enable those involved to receive any ‘legitimate’ income. Furthermore, as almost all income is taxed if discovered it would be more difficult for people to hide property that they have gained through illegitimate means. 

Having to create front companies would be a costly enterprise that would make criminal activity less remunerative—a tax on crime. More importantly, providing information about these fake front businesses opens up the possibility of scrutiny. Not only would this mean that such enterprises would be more likely to be found out but they would also have linked themselves to all those engaged in the enterprise—all involved would go down with the ship. 

Online course: Introduction to Political Philosophy

I'm pleased to announce that I will be teaching on an introductory course in Political Philosophy with my department next Spring/Summer. There are no entry requirements.

If you know of anyone who might be interested in learning about this subject through an online course then please let them know. 

I haven't taught for a couple of years so it will be good to get back into it and if it goes well I might do more in the future.

Blog hiatus

Apologies to those who have been waiting patiently for blogs on tax, politics and philosophy lately...

I have had a very busy summer and haven't been able to fit any blog-writing in.

I have managed to achieve something though, and here is a photo of Katy and I driving away from the church...

What kind of government punishes poor children?

Why doesn’t the Government offer soft loans to impoverished parents to replace the benefits being cut? What kind of government, or even society, shows total disregard for its worst-off children?

The recently elected UK government has been relentlessly tough on the younger members of society while maintaining support for pensioners. There’s nothing too unexpected about that given their voters. But I find the proposed changes to child support, child tax credits and the extension of the household welfare cap to be particularly concerning.

There is a bizarre masochistic streak in our society at the moment, whether stoked by tabloids or TV shows such as Benefits Street, whereby there is a desire for suffering to be shared out. If this is where we are then I suppose it is democratic to see that through.

However, I don’t understand how any society could seek to hinder the lives and prospects of some of its poorer children. The complaint is presumably that some “feckless” parents have created significant expenses for their society and that the rest of society should not have to support them, or at least only to a limited extent.

However, if this was the only factor in play then I would suggest the obvious policy response is to give parents child-related benefits above a certain threshold in the form of a soft student-style loan rather than allow the children affected to go without. This is exactly what the government has proposed in switching from maintenance grants for poorer students to loans.

Why not do the same for payments to poorer parents? Perhaps the proposed changes are actually intended to send a message? The intention could just be to bring about behavioural change and foster the responsibility that Tories prize. However, whose behaviour is it supposed to change?

It isn’t the children’s behaviour that needs to be changed—it is presumably that of their parents at some point in the past. Punishing some children now in the hope of reducing the number of children in need of help in the future seems particularly cruel. Furthermore, it is possible that the present and future parents whose choices are driving the desire for this action are unlikely to be influenced by cold calculation about the future benefits available for them and their children.

So perhaps the issue is just that the deficit has to be reduced and sadly this is the only way to do so. In terms of government income and expenditure, soft loans to poor parents to enable them to improve their children’s lives will have a relatively low prospect of repayment. But if the repayment threshold were set reasonably low then once the children were grown up some of the money could be recouped.

However, deficit reduction isn’t the only priority for the government. George Osborne relaxed his deficit targets in coalition and has done so again in majority government. The government has now committed to maintaining or increasing defence spending. The deficit could also be cut by tax rises as well. A one-off wealth tax or the introduction of a Land Value Tax would be sensible ways to raise some extra cash without crashing the economy. The government doesn’t care THAT much about the deficit—it is just a reason wheeled out when necessary.

However we have got to this situation where so many people seem supportive of punitive changes to the welfare system I still find it hard to see why soft loans aren’t a more sensible option. Otherwise the aim is to visit the sins of the parents on the children, something I think it unacceptable. 

Thoughts on the budget

The budget announced today came with some surprises, and I thought I would give my stream of consciousness response to the headline changes.

·         The big surprise is the major increase in the minimum wage announced under the heading of a national living wage. As the new ‘living wage’ is national it does not take account of the disparities in regional living costs that the living wage is designed to highlight.

The rebranding of the minimum wage is strange, perhaps designed to muddy the term to rob it of its power. Being cynical, this might be out of a desire to undermine the growing campaign that is highlighting the increasing disconnect between earnings and the cost of living in the UK.

The increase in the minimum wage (as this is what it is) is quite a move by Osborne. It takes a typically left-wing policy proposal and enables the chancellor to portray himself as a friend of the worker.

·         Only workers over 25 get the new living/minimum wage though, as far as I can make out. There are already age-bands designed to give inexperienced school-leavers a chance in the job-market so this isn’t a major departure.

·         What of the low-pay commission, the independent body charged with determining what minimum wage level will be sustainable? They will presumably still be in charge of the ‘real’ minimum wage while Osborne has created another band, over which he has control.

·         I have recently blogged about my preference for tax credits over high minimum wages and the policy here is going in the opposite direction. Cutting the eligibility threshold for tax credits is painful as it further undermines this support to workers and/or the employers who can make use of their labour.

·         Questions remains about what will happen as a result to prices and the job market. Perhaps this will be good at reducing the number of NEETs but at what cost? It might mean that a lot of over-25s end up unemployable as under-25s can be employed for less money than them.

Companies who have to pay their workers more are going to pass this on to their customers in the long run. These increased prices will cost those on frozen benefits and those who do not benefit from the policy as well as everyone else.

It is likely that most people will be losers from this policy and some of those losers will be among the economically worst off. The chancellor claims he represents ‘working people’ but certainly not the working class who might find themselves out of work but with fewer options and less support.

·         Positive proposals: To give credit where it is due, the Buy-to-let tax break cut and tightening up eligibility for "non doms" sounds like good things, though I haven’t had a chance to look in any real detail.

·         A terrible idea: The proposal to increase the inheritance tax threshold was heavily trailed and I was predictably apoplectic about this. Unearned income like gifts and bequests should be taxed more heavily than anything else, according to almost all economic and ethical theories of tax.

·         Punitive:  The punishment imposed on younger people for not having a wealthy and generous family continues. Under 25’s needing benefits and low-earning parents seem to be particular targets of this government, just as they are of tabloids. Today’s changes to maintenance grants, housing benefit, Child Tax Credits and the newly lowered Benefit cap seem to be targeted at these “feckless scroungers.”

As a recent guardian editorial pointed out, there isn’t any actual principle behind the benefit cap—it is benefit-scrounger-bashing-tabloid-fodder. A similar point can be made about the other punitive changes—punish the young and the poor (they don’t vote Tory anyway).

·         What magic happens when someone reaches 25? This budget seems to build on the premise that people become very different at this age. Perhaps this is the government reflecting on the extended adolescence that people are considered to have in this SO-CALLED (by me, right now) binge-drinking and computer-game age.

I’m sceptical that there is anything so considered—the young are not a popular constituency with most voters and so are ripe for cuts. These changes also entrench inequality – with one set of young people trapped in low-paid work which provides little time and money left over for further development, while others can get ahead. It all appeals to the Tory base.

·         Overall trend:  One thing that this budget continues is the removal of state support in many areas and passing this on to individuals (or the BBC). Education is an obvious case, where gradually grants have been replaced with fees and loans. Public transport (such as rail travel) is another area where more revenue comes from passengers and less from government as time goes on.

In-work benefits seem to be going the same way, and I have slightly more of a problem with that than education and public transport subsidy, but I think it is worth noting. My question is whether we really need to give up on a progressive tax system that could fund a fairer society which would encourage people into work, improve their chances of finding some and ensure that they get a reward for it.

This isn’t a universal trend – pensioners and the NHS continue to be funded at previous levels. But it is a noticeable direction of travel. It would be good to have a progressive tax system that enabled us to move in the opposite direction in some cases (tax-credits being my own preferred method).

·         Overall this budget (unsurprisingly) doesn’t get the seal of approval from me. 

The real problem with UK tax credits

In my previous post I was very critical of the argument that Tax Credits are simply a form of ‘corporate welfare.’

However, I want to flag up one very good point raised by Deborah Orr where this claim is quite probably true. Tax credits utilise a working-hours threshold (of 16, 24 or 30 hours depending on family composition) which will have unwanted effects.

This could be seen as a form of corporate welfare where companies will be able to more easily (and potentially more cheaply) hire two part-time staff to do the job that could be done by one.

This might not be an entirely detrimental outcome—tax credits may have been one of the factors why the downturn in the UK economy as a result of the global financial crisis caused mass underemployment rather than mass unemployment. Employers might otherwise prefer one full-time employee to two part-time employees and there will no doubt be someone out there (possibly one of the part-timers) who would prefer to do the job full-time.

But the hour working threshold will still have unwanted effects. There are no doubt numerous cases where both worker and employer would prefer to have more work hours in a week in the absence of the threshold.

A further problem with the hours threshold for tax credits is that it means that these are not doing as much to assist low-paid workers who work very long hours, for example two minimum wage jobs.

But what is the alternative to the working hours threshold? The logical extension is to take account of the actual amount of hours people have worked and give people more support if they a) work longer and b) work at a low wage.

My hourly averaging proposal does this. It therefore represents a much more effective form of earnings subsidy. It is targeted at those who have a low lifetime average income and gives an incentive for people to keep working full time in order to generate more income. 

The Living Wage vs. Earning Subsidies

Is the Living Wage campaign just counterproductive?

There has been much discussion recently about the Living wage, or the lack thereof in many cases. The living wage represents the idea that the current UK minimum wage does not always provide enough to give people an adequate living. Living wage campaigners have two routes open to them – to argue that the minimum wage should be raised to living wage levels or to shame companies into paying their staff a living wage.

I am doubtful that either will succeed, but also that success with either would make a huge difference to the people at the bottom of the wage scale. The campaign to shame (and presumably boycott) companies would have to be pretty universal in order to overcome the competitive disadvantage such firms would face if they start paying their workers more than their competitors. This is a point Engels pointed out 150 years ago. Customers would have to voluntarily shop in the more expensive shops which pay the living wage instead of their cheaper rivals.

This explains the problem with imposing a higher minimum wage as well—that this will be passed on to consumers, many of whom are the low-paid people we wanted to help in the first place.

One recent line of attack is to highlight how much some major companies have been benefitting from the tax credit system. This is calculated by working out how much tax credit money is paid to assist the staff of the company in question.

The comparison is between the current situation (where companies with low-paid employees receive tax credits) and an alternative in which they would be forced to pay more and therefore the state would not have to pay as much.

This is a simple equation but it isn't a meaningful one. The question we face is about policy: Should we use tax credits to raise the living standards of low-paid workers or use minimum wage regulations?

If you change from one policy to the other it wouldn't simply mean that a cheque for the difference would be due. The important question for such an exercise is what represents the relevant counterfactual. If there were no tax credits this would not mean that firms would pay their staff more to get them to this income level. Their workers would just have less money in their pockets.

What about the alternative counterfactual that firms would be forced to pay the living wage? If companies were forced to pay their workers more then they would make all kinds of different decisions. Some would go out of business as they could not compete with foreign competition while some others would cut their workforce and replace them with machines.

But what about those businesses, like Tesco, which would survive and would not be able to employ robots or other technology to do the work? Firms would not respond by just paying their workers more and their shareholders and managers less. Firms might invest in labour saving equipment to reduce the number of staff they need, putting people out of work.

This would cut the tax credit bill, but it would not indicate any ‘subsidy’ to the corporations. The costs would pass mostly onto their customers, but also onto the unemployment bill where workers have lost their jobs.

Whichever way you look at it, tax credits don’t represent a simple subsidy to corporations (except in the cases I mention in my next blog). Some corporations will benefit from them of course, but at most a small fraction of the total cost of the tax credit scheme.

Some of the cost will go in administrative costs, lost incentives and economic inefficiencies. If any unintended group is likely to benefit it will be consumers (which means everyone) who get cheaper stuff, but mostly the scheme will help low-paid workers.

One reason some people are distrustful of the left is that they deem them incoherent or incompetent when it comes to economics and policy and I fear that campaigns like this do not do the egalitarian cause much good.