I attach a paper (in Word 6.0.1 for Mackintosh) summarising the paper I
sent on 11th February re Reducing Unemployment.
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I give below a summary of the paper "REFORM OF THE TAX AND BENEFIT SYSTEM
TO REDUCE UNEMPLOYMENT", which I emailed into UK-policy group yesterday
11th February. I have also today faxed in to 01223 740079 some further
notes and diagrams relating to the paper.
The proposed reform has two parts. One is the Work-Spreading Tax, which
provides the incentive for employers to employ more workers. The other is a
new form of Earned Income Tax Credit, referred to as the Conditional
Benefit scheme, which enables the low-paid to obtain a certain guaranteed
minimum income per week, and a certain guaranteed minimum income per hour,
but without creating an unemployment trap or a poverty trap. The two
reforms are independent of each other--either could be used alone, or they
could be used together, for maximum impact on unemployment.
THE WORK-SPREADING TAX
The simplest and minimal form of WST is to convert the present income tax
paid by employees on their earnings, into an equivalent tax paid by the
employer. Thus the employer pays no tax on the first portion of a worker's
wage, and pays a flat or perhaps slightly progressive tax on the rest of
it. This will make little or no difference to workers who work an average
number of hours per week--they will be paid a wage about the same as their
previous wage less tax. The difference will be for the employers, who will
in effect be receiving a subsidy per worker equal to the tax NOT paid on
the first portion of the worker's wage. They will thus have an incentive to
spread the available work, so as to receive more of these subsidies,
employing more workers each working fewer hours, to do a given amount of
work.
A stronger WST can be obtained by abolishing the National Insurance
contributions, both those paid by the worker and those paid by the
employer, and including them in a WST with a higher rate of tax and perhaps
a larger exemption, that is, a larger initial portion of the wage on which
the employer pays no tax. This will give the employer a larger subsidy per
worker, and so will strengthen the employer's incentive to spread work.
(The paper also sets out a maximal WST, in which in addition the
value-added tax is abolished, and converted into an extra tranche of WST.
However, I now see no point in this, as VAT is not a progressive tax. If we
want to make WST stronger and more progressive, this can be done without
including VAT in it.)
The expected effect of WST is as follows. Whilever there are unemployed
workers available who can do the work, it will be in the interest of each
employer to reduce the hours worked per week, and to increase the number of
workers employed. It might not in general be possible for the employer
simply to make an immediate reduction in the standard working week, since
this would create too much opposition from the workers. But in various ways
the average working week can be reduced, and extra workers can be taken on.
Thus if workers leave or retire, or if production needs to be expanded, the
employer will seek to give jobs to unemployed workers, rather than give his
existing work force more hours of work per week. He will prefer to take
them on as part-timers if he can get them, since this will enable him to
employ more new workers, and save more tax. If a pay rise is being
negotiated, the employer will probably seek to include some reduction of
hours per week as part of the bargain, that is, he will seek to persuade
workers to take part or all of their rise as an increase in leisure, rather
than as an increase in total pay. This will allow him to save tax, by
taking on more workers from the unemployed.
How then does WST differ from Geoff Beacon's proposal to give employers a
fixed subsidy per worker, financed by a 5 per cent rise in VAT? The
difference is that GB's scheme is redistributive, benefiting the lower-paid
at the expense of the higher-paid. WST, however, need not be any more
redistributive than the present system. What it does is to change the
method of collecting tax, so as to use the EXISTING degree of
redistributiveness in the tax system=20(which currently goes to waste, as fa=
r
as unemployment prevention is concerned) to provide a per-head labour
subsidy, without cost in terms of extra tax.
THE CONDITIONAL BENEFIT SCHEME
This scheme is a new form of Earned Income Tax Credit, designed to give a
better deal to the lowest earners, but in such a way as to avoid creating
an unemployment trap or a poverty trap. Because of the better targetting,
the scheme, as compared with a standard EITC, is likely to be able to
provide any given minimum guaranteed income for a smaller total expense, or
to provide a greater minimum income for any given expense.
The standard EITC provides benefit conditional upon earning, up to some
level of earnings (let us say =A31 of benefit for every =A31 earned). After
this point, the benefit is withdrawn as earnings increase (let us say 70p
is withdrawn for each =A31 earned), until at some level no benefit is given.
The benefit is paid by the employer, along with the worker's wages, just as
PAYE tax is deducted by the employer at present.
With the Conditional Benefit scheme, the difference is that a person who
earns a low amount per hour, is given a benefit per hour of work done, up
to some fixed number of hours per week (let us say 20 hours). The lower is
the hourly wage, the higher is the benefit (so that it partially
compensates for the low wage, but without removing the incentive to get a
higher wage). The benefit is such that, if the person does 20 hours of
work, they get, in total wage and benefit, an amount equal to the "basic
benefit" (the minimum guaranteed weekly income) plus some fixed percentage
of earnings (let us say 30 per cent). If they do more than 20 hours of
work, this benefit is withdrawn, as it is with the standard EITC above the
fixed level of earnings. However, the difference here is that the lower is
the hourly wage, the LOWER is the withdrawal rate. Thus with a very low
hourly wage, there is no withdrawal at all, and the person keeps their
benefit and the whole of any extra earnings which they make, above 20 hours
of work.
In the paper, it is assumed that there will be no income tax, this having
been converted into WST. However, if Conditional Benefit is used alone,
income tax and national insurance contributions will still be charged. How
then are the benefit and tax systems to be combined, without producing a
low or negative return for extra work, that is, a poverty trap? The
solution I propose is that a person should be given whichever is greater,
EITHER full benefit plus wage less that percentage of the wage specified as
their withdrawal percentage, OR wage less appropriate tax and national
insurance. ("Full benefit" is defined as that amount received if the person
does 20 hours of work at zero wage, such as voluntary work for a charity.)
Thus the return for extra work will never be less than the hourly wage,
less the withdrawal percentage.
Another question not dealt with in the paper is that of who should receive
any child benefit paid in excess of the "universal" child benefit that all
parents get, or any benefit paid in respect of a non-working partner. I
therefore propose that the excess child benefit should be paid directly by
the state to the caring partner, and that similarly the non-working partner
should be paid the appropriate benefit directly. The amount of these direct
payments to the non-earning partner should be added to the tax bill of the
earning partner, who would thus pay them back to the state only if he or
she could afford it, that is, had earnings enough to pay tax rather than
receive benefit.
What then are the advantages of the Conditional Benefit scheme over a
standard EITC? With a standard EITC, a person with a low hourly wage is
likely not to be able to earn enough to get full benefit. Hence the
standard EITC requires that there should also be a legally fixed minimum
wage per hour. But the minimum wage is likely to reduce the number of jobs
on offer, so that low-skilled persons do not get a chance of earning at
all.
However, with Conditional Benefit, there is no earnings requirement, and a
person will always be able to find the 20 hours of work needed to obtain
full benefit, even if it is voluntary work for a recognised charity, or
temporary work provided by the state, until the person can find a better
job. Thus with Conditional Benefit, a legally fixed minimum hourly wage
will not be needed, since the scheme already guarantees a minimum hourly
INCOME (of wage plus benefit), and indeed the minimum wage would be
counter-productive, since it would prevent people from pricing themselves
into jobs which they want to have.
THE COMBINED TAX-BENEFIT SCHEME
I also argue in the paper that the combination of Work-Spreading Tax and
Conditional Benefit is superior in its effects to a Basic Income Scheme, in
that it is likely to give a greater reduction in unemployment, in that it
guarantees a higher minimum income for any given total cost, and in that it
provides better work incentives, not only for the lowest earners, but also
for the bulk of middle earners who are at present paying tax.
The combined WST-CB scheme also appears to compare well with the present
government's welfare-to-work proposals. Under the new scheme, unemployed
people who do not have qualifications and experience, will be able to take
jobs at low pay, in order to acquire a higher level of skill, while
nevertheless getting a total income of wage and benefit which is enough to
live on. Employers will have a greater incentive to provide such jobs,
since under WST they will pay no tax on them; and similarly the unemployed
will have a strong incentive to take them, in order to qualify for the
Conditional Benefit. Thus the new scheme will promote what is in effect
on-the-job training, with the added advantage that it can be unofficial,
without needing to be organised, or paid for, by the government.
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-- With best wishes, David Chapman <chapman @democdesignforum.demon.co.uk> Democracy Design Forum Coles House, Buxhall, Stowmarket, Suffolk IP14 3EB, UK Tel +44 [0]1449 736 223 Fax +44 [0]1449 612 274 Website <http://www.democdesignforum.demon.co.uk/index.html>
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