Pressure has been growing in the UK for people to be paid no less than a living wage. The Living Wage Foundation claims that this should be £8.55 per hour in London and £7.45 in the rest of the UK. The current minimum wage is £6.19.
There has been considerable support for a living wage across the political spectrum. Ed Miliband, the Labour leader, has stated that a Labour government would ensure that government employees were paid at least the living wage and that government contracts would go only to firms paying living wages. Other firms that paid less could be ‘named and shamed’. The living wage has also been supported by Boris Johnson, Conservative Mayor of London. The Prime Minister said that a living wage is ‘an idea whose time has come’, although many Conservatives oppose the idea.
The hourly living wage rate is calculated annually by the Centre for Research in Social Policy and is based on the basic cost of living. The London rate is calculated by the Greater London Authority.
Advocates of people being paid at least the living wage argue that not only would this help to reduce poverty, it would also help to reduce absenteeism and increase productivity by improving motivation and the quality of people’s work.
It would also bring in additional revenue to the government. According to a report by the Institute for Public Policy Research and the Resolution Foundation, if everyone were paid at least a living wage, this would increase the earnings of the low paid by some £6.5bn per year. Of this, some £3.6bn would go to the government in the form of higher income tax and national insurance payments and reduced spending on benefits and tax credits. Of this £6.5bn, an extra £1.3 billion would be paid to public-sector workers, leaving the Treasury with a net gain of £2.3bn.
But what would be the effect on employment? Would some firms be forced to reduce their workforce and by how much? Or would the boost to aggregate demand from extra consumer spending more than offset this and lead to a rise in employment?. The following articles look at the possible effects.
Articles
Living wage for all workers would boost taxes and GDP Independent, Nigel Morris (28/12/12)
Living wage could save £2bn – think tank research BBC News (28/12/12)
‘Living wage’ would save money, says study Financial Times, Helen Warrell (28/12/12)
Why the Resolution Foundation and IPPR can go boil their heads Adam Smith Institute, Tim Worstall (30/12/12)
Living wage for public servants moves a step closer The Observer,
Yvonne Roberts and Toby Helm (15/12/12/)
Living wage: Ed Miliband pledge over government contracts BBC News (5/11/12)
‘London Living Wage’ increased to £8.55 by mayor BBC News (5/11/12)
Q&A: The living wage BBC News (5/11/12)
Scrooges in UK firms must pay a Living Wage This is Money, John Sentamu (23/12/12)
Report
What price a living wage? IPPR and The Resolution Foundation, Matthew Pennycook (May 2012)
Questions
- How would you set about determining what the living wage rate should be?
- Distinguish between absolute and relative poverty. Would people being paid below a living wage be best described as absolute or relative poverty (or both or neither)?
- What do you understand by the term ‘efficiency wage’? How is this concept relevant to the debate about the effects of firms paying a living wage?
- Under what circumstances would raising the statutory minimum wage rate to the living wage rate result in increased unemployment? How is the wage elasticity of demand for labour relevant to your answer and how would this elasticity be affected by all firms having to pay at least the living wage rate?
- What would be the macroeconomic effects of all workers being paid at least the living wage rate? What would determine the magnitude of these effects?
There has been considerable discussion recently about whether the government should introduce a property tax on high value properties. The government, finding it difficult to reduce the public-sector deficit and yet determined to do so, is looking for additional measures to reduce government expenditure or raise tax revenue.
But would it favour a mansion tax as a means of raising additional revenue?
The imposition of such a tax is favoured by both Liberal Democrats and the Labour Party. It is strongly opposed, however, by Conservatives. But just what would such a tax look like and what are the arguments for and against it?
One alternative would be to impose a one-off tax on property valued over a certain amount, such as £2 million. Alternatively it could be levied only for as long as the government is seeking to make substantial inroads into the deficit.
Another would be to add one or more bands to council tax. At present, council tax in England is levied in 8 bands according to the value of a person’s property. The highest band is for property valued over £320,000 in 1991 prices, with the amount of tax due for each band varying from local authority to local authority. (Average UK house prices in 2012 are 135% higher than in 1991.) In Scotland the bands are lower with the top band being for property valued over £212,000 in 1991 prices. In Wales, there is an additional band for property valued over £424,000, but properties are valued in 2003 prices, not 1991 prices.
With low top bands for council tax, people in mansions end up paying the same as people in much more modest property. It would be relatively easy to add additional bands, with the top band applying only to property worth, say, over £1 million or more.
The arguments in favour of a mansion tax are that it is progressive, relatively easy to collect, hard to evade and with minimal disincentive effects. The arguments against are that it would make the tax system ‘too progressive’, would not necessarily be related to an individual’s ability to pay and could have substantial disincentive effects.
The progressiveness of the UK tax system is illustrated in the chart, which looks at the proportion of income paid in direct, indirect and all taxes by quintile groups of households – that is, households grouped into five equal sized groups ranked from lowest to highest gross income. (Click here for a PowerPoint of the chart.)
The following articles look at the debate as it has raged over the past few weeks. Try to unpick the genuine arguments from the political rhetoric!
Articles
Clegg Says U.K. Could Apply Mansion Tax ‘in Five Seconds’ Bloomberg, Robert Hutton (25/9/12)
Two thirds back mansion tax on £1m homes Metro, Tariq Tahir (8/10/12)
Mansion tax would ‘tackle inequality’ This is Tamworth (27/9/12)
Council tax: the easy way to make mansion-dwellers pay Guardian, Simon Jenkins (25/9/12)
Rich must pay fair share in tax BBC Andrew Marr Show, Nick Clegg (23/9/12)
We will get mansion tax on £2 million homes through next budget, promise Lib Dems The Telegraph, Rowena Mason (25/9/12)
Trying to tax the wealthy not worth the price The Scotsman, George Kerevan (31/8/12)
Tax on wealth is true to Tory principles Financial Times, Janan Ganesh (24/9/12)
How would Clegg’s emergency wealth tax work? Guardian, Hilary Osborne (29/8/12)
Labour considers mansion tax on wealthy Financial Times, George Parke (5/9/12)
Conservative conference: Cameron rules out ‘mansion tax’ BBC News (7/10/12)
Don’t make wealth tax a habit Financial Times, Howard Davies (29/8/12)
George Osborne blocks mansion tax, but insists wealthy will pay more The Telegraph, Robert Winnett (8/10/12)
Why George Osborne had to kill the mansion tax The Spectator, Matthew Sinclair (7/10/12)
David Cameron rules out mansion tax and plans further welfare cuts Guardian, Hélène Mulholland (7/10/12)
Viewpoint: Would a wealth tax work? BBC News, Mike Walker (29/8/12)
For all the claims made about wealth taxes, it’s not correct to say the rich are paying their fair share Independent, Jonathan Portes (2/10/12)
Data
House price data links Economics Network
The Effects of Taxes and Benefits on Household Income, 2010/2011 ONS (26/6/12) (see especially Tables 2 and 3 and Table 26 for historical data)
Questions
- Explain the distinction between direct and indirect taxes, and between progressive and regressive taxes. For what reasons do the poor pay a higher proportion of their income in indirect taxes than the rich?
- What forms can a tax on wealth take?
- How progressive are taxes in the UK (see the ONS site in the Data section above)?
- Assess the arguments in favour of a mansion tax.
- Assess the arguments against a mansion tax.
- What type of wealth tax would be hardest to evade?
- What are the likely income and substitution effects of a wealth tax?
A campaign to introduce a tax on disposable plastic bags in England has been launched by various pressure groups, including The Campaign to Protect Rural England (CPRE), Keep Britain Tidy, the Marine Conservation Society and Surfers Against Sewage. Plastic bags, they maintain, litter streets and the countryside and pollute the seas, where they cause considerable damage to marine life.
They propose a tax of 5p per bag, which would be passed on to consumers. Such a levy has already been introduced in Wales in October 2011. As a result, plastic bag use in Wales has dropped dramatically (see also the full report from the Welsh Government). The Scottish Government and the Northern Ireland Assembly are also planning introducing similar charges.
Many other governments have introduced taxes, charges or bans on plastic bags and many more are considering introducing such measures. Ireland introduced a 15 euro cent charge on single-use plastic bags as far back as 2002 and saw a 94% reduction in plastic bag use (328 per person per year to 21). The charge was raised to 22 euro cents in 2007 after bag use rose to 30 per person.
Other countries have banned plastic bags altogether: some, such as Rwanda and Somalia have banned all plastic bags; others, such as China and South Africa have banned very thin bags; others, such as Italy, have banned non-biodegradable ones.
In the USA, various states or districts have introduced levies and in the EU, where more than four billion bags are thrown away each year, the European Commission will soon publish proposals for limiting the use of plastic bags.
So what are the arguments for limiting the use of plastic bags? Why is it not enough to leave things simply to the market? And if the use of plastic bags is to be reduced, what’s the most efficient way of doing so? Are there any problems with alternatives to plastic bags? The following articles and reports consider these questions?
Articles
England urged to pick up Wales’ plastic bag levy businessGreen, Jessica Shankleman (1/8/12)
Wales’ plastic bag charge yields massive green savings businessGreen, Jessica Shankleman (5/7/12)
Supermarkets ‘should charge £1 a bag’ BBC Today Programme, Samantha Harding and Judith Holder (2/8/12)
Environmentalists team up to push for bag tax in England Plastics News, Anthony Clark (1/8/12)
Break the Bag Habit Keep Britain Tidy (1/8/12)
Plastic bag use ‘up for second year running’ Guardian, Rebecca Smithers (5/7/12)
Plastic bag use in Wales plummets due to 5p charge, figures show Guardian, Adam Vaughan (4/7/12)
Carrier bag charge ‘effective and popular’ figures reveal ITV News (4/7/12)
What should be done about plastic bags? BBC News Magazine, Chris Summers (19/3/12)
Irish bag tax hailed success BBC News, Chris Summers (20/8/02)
The Big Fix The Math Behind Sacking Disposable Bags Atlantic Cities, Nate Berg (26/9/11)
Fremantle moves to ban plastic bags ABC News, Lucy Martin (23/7/12)
Bans Plastic Bag Ban Report, Ted Duboise (updated)
Vote With Your Dollars, and Also Vote New York Times, Gernot Wagner (30/7/12)
Reports
Evaluation Of The Introduction Of The Single-Use Carrier Bag Charge In Wales: Attitude Change And Behavioural Spillover, Wouter Poortinga, Lorraine Whitmarsh and Christine Suffolk Report to Welsh Government by Cardiff University (June 2012)
Life cycle assessment of supermarket carrierbags: a review of the bags available in 2006 Environment Agency, Joanna Marchant (25/7/11)
Stakeholder consultation on options to reduce the use of plastic carrier bags … EC Environment (19/3/12)
Questions
- Draw a diagram demonstrating the externalities involved in the use of plastic bags. Show the marginal private and social costs and benefits and the socially efficient level of consumption.
- How would you set about establishing the amount of consumer surplus from the use of plastic bags at a zero price?
- Compare the relative social efficiency of a tax on plastic bags with a ban on plastic bags.
- Would education be an effective alternative to taxing plastic bags?
- Why might it be difficult to get supermarkets and other retailers to agree to a voluntary ban on giving out free plastic bags?
- Why might it be extremely difficult in practice to establish the socially efficient price for plastic bags?
Barclays’ Chief Executive, Bob Diamond, has resigned following revelations that Barclays staff had been involved in rigging the LIBOR in the period 2005–9, including the financial crisis of 2007–9.
So what is the LIBOR; how is it set; what were the reasons for Barclays (and other banks, as will soon be revealed) attempting to manipulate the rate; and what were the consequences?
The LIBOR, or London interbank offered rate, is the average of what banks report that they would have to pay to borrow from one another in the inter-bank market. Separate LIBORs are calculated for 15 different lending periods: overnight, one week, one month, two months, three months, six months, etc. The rates are set daily as the average of submissions made to Thomson Reuters by some 15 to 20 banks (a poll overseen by the British Bankers’ Association). Thomson Reuters then publishes the LIBORs, along with all of the submissions from individual banks which are used to calculate it.
Many interest rates around the world are based on LIBORs, or their European counterpart, EURIBORs. They include bond rates, mortgage rates, overdraft rates, etc. Trillions of dollars worth of such assets are benchmarked to the LIBORs. Thus manipulating LIBORs by even 1 basis point (0.01%) can result in millions of dollars worth of gains (or losses) to banks.
The charge, made by the Financial Services Authority, is that Barclays staff deliberately under- or overstated the rate at which the bank would have to borrow. For example, when interbank loans were drying up in the autumn of 2008, Barclays staff were accused of deliberately understating the rate at which they would have to borrow in order to persuade markets that the bank was facing less difficulty than it really was and thereby boost confidence in the bank. In other words they were accused of trying to manipulate LIBORs down by lying.
As it was the LIBORs were rising well above bank rate. The spread for the one-month LIBOR was around 1 to 1.2% above Bank Rate. Today it is around 0.1 to 0.15% above Bank Rate. Without lying by staff in Barclays, RBS and probably other banks too, the spread in 2008 may have been quite a bit higher still.
The following articles look at the issue, its impact at the time and the aftermath today.
Articles
A Libor primer The Globe and Mail, Kevin Carmichael (3/7/12)
60 second guide to Libor Which? (3/7/12)
Explaining the Libor interest rate mess CNN Money (3/7/12)
Fixing Libor Financial Times (27/6/12)
LIBOR in the News: What it is, Why it’s Important Technorati, John Sollars (2/7/12)
Libor rigging ‘was institutionalised at major UK bank’ The Telegraph, Philip Aldrick (1/7/12)
Barclays ‘attempted to manipulate interest rates’ BBC News, Robert Peston (27/6/12)
The Libor Conspiracy: Were the Bank of England and Whitehall in on it? Independent, Oliver Wright, James Moore , Nigel Morris (4/7/12)
Fixing LIBOR The Economist (10/3/12)
Cleaning up LIBOR? The Economist (14/5/12)
Eagle fried The Economist, Schumpeter (27/6/12)
Barclays looks like the victim Financial Post, Terence Corcoran (3/7/12)
Inconvenient truths about Libor BBC News, Stephanie Flanders (4/7/12)
Timeline: Barclays’ widening Libor-fixing scandal BBC News (5/7/12)
The elusive truth about Barclays’ lie BBC News, Robert Peston (4/7/12)
Rate Fixing Scandal Is International: EU’s Almunia CNBC, Shai Ahmed (4/7/12)
Bank-Bonus Culture to Blame for Barclays Scandal The Daily Beast, Alex Klein (3/7/12)
Libor scandal ‘damaging’ for City BBC Today Programme, Andrew Lilico and Mark Boleat (5/7/12)
Data
Libor rate fixing: see each bank’s submissions Guardian Data Blog, Simon Rogers (3/7/12)
Sterling interbank rates Bank of England
Questions
- Using data from the Bank of England (see link above), chart two or three LIBOR rates against Bank rate from 2007 to the present day.
- For what reason would individuals and firms lose from banks manipulating LIBOR rates?
- Why would LIBOR manipulation be more ‘effective’ if banks colluded in their submissions about their interest rates?
- Why might the Bank of England and the government have been quite keen for the LIBOR to have been manipulated downwards in 2008?
- To what extent was the LIBOR rigging scandal an example of the problem of asymmetric information?
- In the light of the LIBOR rigging scandal, should universal banks be split into separate investment and retail banks, rather than erecting some firewall around their retail banking arm?
- What are the arguments for and against making attempts to manipulate LIBOR rates a criminal offences?
Let’s face it – no-one likes paying tax! After all, to see your monthly pay decline by £1000 through taxation and national insurance has got to hurt. Yet, taxation and national insurance contributions are essential sources of government revenue to finance benefits and public and merit goods.
However, with so much attention given to the UK’s ‘culture of dependency’, many people are increasingly angry with having to pay so much in taxation to see it being spent by the government on individuals who in some cases choose not to work and at the same time seeing other rich people paying so little in taxation. The increase in the top rate of tax received a lot of coverage. Although it did make the tax system more progressive, there were many concerns that it would lead to lower growth, a lack of innovation and enterprise and increased tax evasion and avoidance, as the super-rich were being hit with phenomenal tax bills. The post on the 50p income tax available here is worth looking at again to think about the effect that taxes have on incentives.
The issue of tax avoidance is by no means new, but with a large budget deficit in the UK, tax avoidance by the super-rich has become something that everyone has an opinion on. The average household has seen its income squeezed more and more, as the government continues its efforts to cut the deficit. The fact that the super rich are avoiding sometimes millions in taxation, while the average household struggles to pay even the basic rate of tax, creates a rather contentious issue. The Chief Secretary to the Treasury, Danny Alexander, has said that the basic rate of tax could be cut by 2p in the pound if tax avoidance came to an end. He commented to the BBC’s Sunday Politics Programme that:
‘We have to make sure that everybody, especially the rich and famous, are paying their fair share of tax…These sorts of schemes that save wealthy people potentially tens of millions of pounds in tax, they are paid for by everybody else… If we could narrow the tax gap in this country by a quarter we could reduce income tax for every basic rate payer by 2p in the pound.’
This would clearly have some very positive effects on some of the poorest people living in the UK.
There is a variety of tax avoidance schemes available and the one receiving the most attention at present is the Jersey-based K2 scheme, which Jimmy Carr and others are thought to be using. The Public Accounts Committee will be reporting on the problem of using private companies to pay salaries, as a means of avoiding income tax and national insurance contributions.
If tax avoidance could be stopped, or at least reduced, then not only could basic rate tax payers benefit, but it might go some way to cutting the budget deficit, giving the government more flexibility in stimulating the economy. According to HMRC, tax avoidance and evasion cost the economy some £42 billion – enough to pay off one-third of Britain’s budget deficit.
The following articles consider the problem of tax avoidance and then try answering the questions on the issue of taxation.
Five-point plan to curb tax cheating by big firms and super-rich Guardian (27/6/12)
Stop tax dodgers or there will be ‘riots on the streets’, warns top lawyer designing new anti-avoidance rules Mail Online, Julian Gavaghan (26/6/12)
Danny Alexander describes aggressive tax avoidance as ‘morally repugnant’ Guardian, Patrick Wintour (24/6/12)
Basic tax ‘could be cut by 2p’ if avoidance ended BBC News(24/6/12)
Danny Alexander says tax avoidance ‘adds 2p in every £1 to basic tax rate’ Independent, Oliver Wright (24/6/12)
Make tax returns public, urges peer The Press Association (28/6/12)
Tax officials reveal scale of probe Financial Times, Jim Pickard (27/6/12)
Questions
- What are the key principles of a good tax system?
- Explain how taxation affects the incentive to work?
- What is the difference between tax evasion and tax avoidance?
- Using indifference analysis, illustrate the effect of a cut in the basic rate of income tax. How does it affect the decision to work more or less? You should consider the income and substitution effects in your answer and which rate of tax (if any) an individual is paying.
- Why is tax avoidance of such concern at the moment? Think about the current state of the economy.
- What are taxes and national insurance contributions used to pay for?
- To what extent do you think tax avoidance is a natural consequence of any tax system?
