This coming week in Britain is supposed to be all about the Living Wage. A much
better description of what is happening would be that we are actually
celebrating Tax Poverty Week. F0r the reason that the British poor do not have
enough to live on is that, incredibly, the government actually taxes the incomes
of the poor. And it doesn’t take the skills of a brain surgeon to work out that
if you wanted the poor to have more money you could and should do this by simply
taxing them less.
As background, the UK has a minimum wage (actually, the National Minimum Wage, or NMW) which is today pegged at GBP 6.19 per hour. There are those who say that this is not enough to live on, or that it leaves people in poverty, and that thus we should do something about this. That something is that we should calculate something called the Living Wage and then appeal to companies to pay that, presumably higher, sum. There is something attractive about this being a voluntary campaign and the method used to calculate that Living Wage is entirely appropriate. There is however one very large problem with the whole idea: which is that if the government were not taxing the minimum wage then the minimum wage would be the same as this Living Wage that is being proffered.
The part of the entire debate that gets missed though (although I have been making bat squeaks about it ever since the idea was first discussed) is that the Living Wage is calculated as a pre-tax number. That is, before the government sticks its hand in and takes some amount of money out of the pay packets of these poor people. And the implications of that are profound.
Assume that someone is working 37.5 hours a week for 52 weeks of the year. A reasonable assumption as that is how many full time British working contracts are defined. At the Living Wage of GBP 7.20 an hour they will thus earn GBP 270 a week or GBP 14,040 a year.
Income tax has a personal allowance, the amount that you can earn tax free before income tax is applied. This is, shamefully, set at the absurdly low number of GBP 9,440 for this tax year. Thus someone earning that Living Wage will be taxed at the basic rate of 20% on 4,600 of their income, or 920 pounds.
That’s not all though, we also have two forms of National Insurance as well (this is akin to Social Security in the US system). The first part, employees’ NI, is charged at a rate of 12% on earnings above 109 pounds a week. For our person on the Living Wage this is 19.32 a week or 1,004.64 a year.
Employers NI is at the rate of 13.8% and the calculation is not straightforward but it amounts to a further 1,100 a year or so. That we’re not accurate on this part makes no difference, for we’re also not sure of quite how much of this tax burden is ‘really paid by the employer and how much by the employee. There’s not a single economist out there who would, with a straight face, assert that the employer is carrying all of that burden. And the majority would say that most to all is being carried by the employee. But we don’t know the exact split so being a bit hazy here with the numbers doesn’t matter.
So our Living Wage earner will be, for a full year of full time work, be taking home GBP 12,116 in actual ready cash that belongs to her.
Compare and contrast this with the National Minimum Wage if no tax were applied to it: the same hours, 37.5 per week for 52 weeks at 6.19 an hour would be 12,070.50 using just the income tax and the employees’ NI. We could say that 45.50 over a year is really just the same number: or we could apply some part of the burden of the employers’ NI to the worker. Either way we have just shown that the minimum wage is in fact the Living Wage: or would be if it weren’t for the way that government slips its sticky fingers into the pay packets of the poor.
orbes
As background, the UK has a minimum wage (actually, the National Minimum Wage, or NMW) which is today pegged at GBP 6.19 per hour. There are those who say that this is not enough to live on, or that it leaves people in poverty, and that thus we should do something about this. That something is that we should calculate something called the Living Wage and then appeal to companies to pay that, presumably higher, sum. There is something attractive about this being a voluntary campaign and the method used to calculate that Living Wage is entirely appropriate. There is however one very large problem with the whole idea: which is that if the government were not taxing the minimum wage then the minimum wage would be the same as this Living Wage that is being proffered.
The part of the entire debate that gets missed though (although I have been making bat squeaks about it ever since the idea was first discussed) is that the Living Wage is calculated as a pre-tax number. That is, before the government sticks its hand in and takes some amount of money out of the pay packets of these poor people. And the implications of that are profound.
Assume that someone is working 37.5 hours a week for 52 weeks of the year. A reasonable assumption as that is how many full time British working contracts are defined. At the Living Wage of GBP 7.20 an hour they will thus earn GBP 270 a week or GBP 14,040 a year.
Income tax has a personal allowance, the amount that you can earn tax free before income tax is applied. This is, shamefully, set at the absurdly low number of GBP 9,440 for this tax year. Thus someone earning that Living Wage will be taxed at the basic rate of 20% on 4,600 of their income, or 920 pounds.
That’s not all though, we also have two forms of National Insurance as well (this is akin to Social Security in the US system). The first part, employees’ NI, is charged at a rate of 12% on earnings above 109 pounds a week. For our person on the Living Wage this is 19.32 a week or 1,004.64 a year.
Employers NI is at the rate of 13.8% and the calculation is not straightforward but it amounts to a further 1,100 a year or so. That we’re not accurate on this part makes no difference, for we’re also not sure of quite how much of this tax burden is ‘really paid by the employer and how much by the employee. There’s not a single economist out there who would, with a straight face, assert that the employer is carrying all of that burden. And the majority would say that most to all is being carried by the employee. But we don’t know the exact split so being a bit hazy here with the numbers doesn’t matter.
So our Living Wage earner will be, for a full year of full time work, be taking home GBP 12,116 in actual ready cash that belongs to her.
Compare and contrast this with the National Minimum Wage if no tax were applied to it: the same hours, 37.5 per week for 52 weeks at 6.19 an hour would be 12,070.50 using just the income tax and the employees’ NI. We could say that 45.50 over a year is really just the same number: or we could apply some part of the burden of the employers’ NI to the worker. Either way we have just shown that the minimum wage is in fact the Living Wage: or would be if it weren’t for the way that government slips its sticky fingers into the pay packets of the poor.
orbes
