uk-policy Reply to Gavin Cameron

geoff.beacon@virgin.net
Fri, 29 May 1998 07:34:41 +0100 (BST)

Gavin Cameron wrote:
>
>
> Of course, I may have misunderstood the WST scheme. It may have been making
> the slightly more sophisticated point that you could reduce payroll taxes
> and shift the burden onto consumption taxes (eg VAT) and so keep the overall
> tax burden constant (this is the point Geoff Beacon is making I think) .
>
> However, the key to understanding the impact of tax changes on employment is
> to recognize that it is the overall tax burden on labour (that is, payroll
> taxes plus personal income taxes plus consumption taxes) that is important,
> rather than just the payroll tax rate. Therefore, when I said that 'high
> overall labour taxes' could raise unemployment, I was not referring to
> payroll taxes in particular but to the total tax burden.
>
> A cut in payroll tax that is offset by a rise in VAT will have no effect on
> post tax real wages and so cannot raise labour supply. Therefore it will
> not reduce unemployment.
>
>

I don't know where Gavin Cameron got the idea the either Kim Swales or
myself thought that simply switching taxation from payroll taxes to
consumption taxes (eg VAT) would lessen unemployment. We have suggested
nothing of the kind.

At the risk of being too informal can I say that the purpose of our
proposal is to "Subsidise goods that use lots of labour and tax those
that don't." To do this we have proposed a modification to VAT that
would give a fixed per capita reduction financed by an increase in
the nominal rate.

Clearly the effect of this is to reduce the cost of low-paid
labour relative to high-paid labour and capital. This causes
substitution effects which create jobs where they are needed: at the
bottom end of the labour market.

On another note: The Luxembourg Employment Summit suggests national
governments should consider lower rates of VAT for labour intensive
industries. This is a restricted case of our proposal.

Gavin's misunderstanding has, however, brought one thing home to me.
I must solve the Word Perfect to HTML problem so that the full paper
we did for DG5 can be posted on the Web. I hope I can achieve that
this weekend. In the meantime I am putting a paper copy in the post
to Gavin and anybody else that would like one.

Thanks

Geoff Beacon

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