Monday, 19 March 2012

The Futility of the Minimum Wage

The BBC is reporting that the headline rate for the National Minimum Wage will increase by 11p per hour in October. This will take it from a stunning £6.08 per hour to £6.19, an increase of around 1.8%.

So, there's a few points to make of this:

  1. Due to the Bank of England's deliberate policy of operating real negative interest rates and printing money, the Government's preferred measure of inflation, CPI, is currently running at 4.0%. The more realistic RPI measure is running at 5.3%, rendering the paltry rise in the Minimum Wage useless. Wages are falling in real terms;
  2. Remember that the headline rate of the Minimum Wage is gross, i.e. it doesn't have tax taken off. If you're working even 30 hours a week, you're a taxpayer. Which means you'll pay 20% Income Tax on that 1.8% increase, plus 12% National Insurance. Furthermore, you'll be entitled to tax credits, which are withdrawn at the crucifying rate of 41%. This leads to a marginal tax rate of 73%.
So, that 1.8% increase is actually a 0.49% increase in net cash terms, once the State has stripped you of three quarters of your State-mandated pay rise. And then, when you deduct even the State-sanctioned measure of inflation, the poorest working members of society are going to sustain an income drop in real terms of 3.51%.

But we're all in this together, aren't we, Dave?

An alternative:
  1. Don't bother increasing the headline rate of the Minimum Wage - it isn't worth it. There's no point in introducing an additional cost on businesses for 73% of it to be absorbed by the State - 86.8% if you count the additional 13.8% National Insurance the employer has to pay in Payroll Tax;
  2. Increase the annual allowances for Income Tax and National Insurance by £2,000. Decrease the Higher Rate threshold for Income Tax by the same amount. Increase the Upper Earnings Limit for National Insurance by the same amount. Net cost to the Exchequer - nil;
  3. The effect - delivering up to a £640 per year tax cut to all basic rate taxpayers. For someone on Minimum Wage working 40 hours a week, this compensates for the effects of inflation. For someone working 30 hours a week, it actually provides them with a slight rise.
And that's just playing with thresholds, with no cost to the Exchequer, let alone considering how on Earth it can be considered reasonable to tax people and then pay them SOME benefits back in the form of tax credits.

So, Dear Government, if you want the poor to do well, STOP FUCKING TAXING THEM. YOU BASTARDS.