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 (which currently goes to waste, as far
as unemployment prevention is concerned) to provide a per-head labour
subsidy, without cost in terms of extra tax.
(To be continued in next email)
-- 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> ------------------------------------------------------------- Posted to uk-policy, a service of Nexus. http://www.netnexus.org/