(Details of WST in my contribution of 24/5/98 and in my paper "Reforming
the tax and benefit system to reduce unemployment", available at:
http://www.democdesignforum.demon.co.uk/unemp.nexus.html)
The criticisms of WST by Gavin Cameron and Eero Carroll are I think
adequately dealt with by Jonathan Portes, in his contribution of 28/5/98.
But I want to point out that WST
is not an additional tax, but is merely a change of the present income tax
and social security tax paid by the employees, into an equivalent tax to be
paid by the employer, along with the Employer's NIC. The incentive effect
of this on the employer will be the same as giving him a wage subsidy of
about 35 pounds per week per worker, in that for each extra worker he takes
on to do a given amount of work, he will pay 35 pounds less in tax. This
subsidy is costless, since it doesn't require any increase in the level of
taxation. Thus (pace Gavin Cameron) WST gives us a "free lunch", by making
use of the existing system's unemployment-reducing potential, which is
currently just going to waste.
.
In comparison, Geoff Beacon's work subsidy scheme requires a 5% rise in
VAT, to finance the provision to employers of an equal subsidy per worker
(which might come to about 20 pounds per week). Thus it is redistributive,
making the high-paid worse off and the low-paid better off.
WST thus seems more politically acceptable, as it provides a greater
subsidy without requiring any tax rise or increase in redistribution. If at
some later date greater redistribution were desired, this could be provided
under WST by increasing the % tax rate paid by the employer on wages, and
the amount of the employer's tax exemption per worker.
(2) THE WORK-RELATED BENEFIT
Some contributors have mentioned the Minimum Wage as a means of helping the
low-paid. But the Minimum Wage has the drawback that the greater the help
it gives to some of the low-paid, the greater the number of other low-paid
workers it puts out of work. An alternative means of helping low earners,
which tends to REDUCE unemployment, is the "Work-Related Benefit", put
forward in the above-mentioned paper, "Reforming the tax and benefit system
to reduce unemployment".
WRB is a new type of Earned Income Tax Credit, designed to give the lowest
earners the greatest help which is possible without creating an
unemployment trap or a poverty trap. A person who earns a low amount per
hour, is given a benefit per hour of work done, let us say up to 20 hours
per week. The lower is the hourly wage, the greater is the amount of
benefit given per hour. If the person does more than 20 hours of work, this
benefit is withdrawn, but at a lower rate, the lower is the hourly wage.
With a very low hourly wage, there is no withdrawal at all, and the person
keeps the whole of any extra earnings which they make.
The following properties are claimed for WRB.
*WRB enables the low-paid to obtain (from wage plus benefit) both a
guaranteed minimum income per hour of work, and a guaranteed minimum
income per week.
*However low is the hourly wage, the person has a strong incentive to do
the first 20 hours of work per week, and an adequate incentive to do more
than 20 hours. and to move to a higher-paying job if it is available.
*As compared with a standard Earned Income Tax Credit, the Work-Related
Benefit allows a higher AVERAGE withdrawal rate to be used, without
trapping the poorest into their
poverty.
*Because of this better targeting of benefit, and because of the saving due
to its greater reduction in the number of unemployed, the Work-Related
Benefit scheme is likely to be less expensive than a standard Earned Income
Tax Credit (or a fortiori than a Citizens' Income system or than the
present welfare system), and to provide a greater guaranteed minimum
income, for any given welfare budget.
********************************************
Dr David Chapman
Email: 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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