The living wage and tax

Does the living wage provide an argument for ending tax on the lowest paid?

Forbes blogger Tim Worstall writes, on his personal site:

Note, and nota bene, that the Living Wage is a pre-tax number. This is before the income tax and NI that is charged to these wages. If you take those off (and I’ve not done it for this year’s number but I have for previous years) you find that the living wage of £7.20 (or whatever) an hour is within pennies of the minimum wage of £6.19 (or whatever) an hour.

We don't actually know what the living wage will be this year (it's announced on 5 November), but I thought I'd re-run Worstall's calculations with last year's numbers anyway.

The living wage is calculated based on a full-time worker working for 38.5 hours a week. It's also calculated first for London, then downrated for the rest of the country according to cost of living differences, so we'll do the same. The London living wage is currently £8.30 an hour, and the living wage for the rest of the UK is £7.20 an hour. The national minimum wage when these rates were set was £5.93, but is now £6.19.

A full-time worker in London on the living wage earns £319.55 a week. A full-time worker out of London on the living wage earns £277.20 a week. A full-time worker on the 2012 minimum wage earns £238.32 a week, and a full-time worker on the 2010 minimum wage earned £228.31 a week.

To assess Tim's point, we subtract the basic income tax and NI charged on those wages. Someone on the London living wage pays £35.11 tax and £20.83 NI, leaving them with £263.61 a week. Someone on the non-London living wage pays £26.64 tax and £15.74 NI, leaving them with £234.82 a week.

So if you are out of London and paid the living wage, your income if you paid full NI and tax would be slightly lower than than the pre-tax value of the minimum wage – and even after the amount is uprated next month, it would only be a few pounds higher.

Does this then mean Worstall is right when he says:

It is not that wages are too low. The minimum wage is almost exactly what they say that poverty level is. It is that taxes on the poor are too high. Which is an easy problem to solve, something well within the government’s power. Stop taxing the poor so much.

Well, there's a few more stats to look at first. For one thing, the minimum wage is itself a pre-tax figure. Post income tax and NI, the minimum wage is £208.37, a solid £26 a week lower than the living wage. It's perfectly reasonable to think that, if the living wage could be lower without taxes, the minimum wage could be too.

Secondly, if there's one thing the whole comparison really highlights, it's that while the minimum wage may be acceptable in most of the country, in London it's grossly low. £55 a week, post-tax, is the difference between what it takes to live out of poverty in London and what you actually earn working 38.5 hours a week on the minimum wage.

But thirdly, and most important, the Living wage isn't actually calculated pre-tax. The Greater London Authority, the body responsible for calculating the London living wage, writes (pdf):

If means-tested benefits were not taken into account (that is, tax credits, housing benefits and council tax benefits) the Living Wage would be approximately £10.40 per hour.

Even with all means tested benefits taken into account, the total tax rate for many on the London living wage is likely to be positive; and it's certainly true that there are likely to be inefficiencies involved in taking money in the form of NI while at the same time giving it back as housing benefit. But simply arguing that ending tax on the minimum wage would make it into a living wage seems incorrect. Few, if any, on the living wage pay the maximum amount of tax as calculated above, for the very good reason that that would be a terrible idea.

This doesn't mean that there isn't still a valuable argument to be made about taking the lowest paid out of the taxation system; and it doesn't mean that it isn't deeply strange that people on the minimum wage have to pay money to the government and then ask for it back in kind; but the living wage doesn't really help us make those arguments.

Campaigners for a living wage in 1972. Photograph: Getty Images.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Keir Starmer: “I don’t think anybody should underestimate the risks of getting Brexit wrong”

The former director of public prosecutions is now heading up Labour’s response to Brexit. But can he succeed in holding the Tories’ feet to the fire?

Early in his new role as shadow Brexit secretary, Keir Starmer was accused of being a “second-rate lawyer”. The gibe, in a Commons debate, came from none other than Iain Duncan Smith. Starmer was director of public prosecutions for five years and later stood for parliament in 2015. No novice, then. Within a few days, Duncan Smith stood again in the House, this time to offer his apologies.

A fortnight later, I met Starmer at his quiet office in Westminster. He was sitting at a table piled with papers, in an office that, a discreet family photo aside, was unadorned. He had just got back from a whirlwind trip to Brussels, with many more such visits planned in the weeks ahead.

Starmer returned to the shadow cabinet after Jeremy Corbyn’s second leadership election victory last month. “The series of agreements we will have to reach in the next few years is probably the most important and complex we’ve had to reach since the Second World War,” he told me.

Starmer, who is 54, took his time entering politics. Born in 1962, he grew up in a Labour-supporting household in Surrey – his father was a toolmaker and his mother a nurse – and was named after Keir Hardie. After studying law at Leeds University, he practised as a human rights barrister and became a QC in 2002. In 2008, after varied legal work that included defending environmental campaigners in the McLibel case, he became the head of the Crown Prosecution Service for England and Wales as well as director of public prosecutions, positions he held until 2013.

When in 2015 Starmer ran for a seat in parliament to represent Holborn and St Pancras in London, it was assumed he would soon be putting his expertise to use in government. Instead, after Labour’s election defeat under Ed Miliband, he served as one of Corbyn’s junior shadow ministers, but resigned after the EU referendum in June.

Now, he is back on the opposition front bench and his forensic scrutiny of government policy is already unsettling the Conservatives. Philippe Sands, the law professor who worked with him on Croatia’s genocide lawsuit against Serbia, says he couldn’t think of anyone better to take on the Brexiteers in parliament. “It’s apparent that the government is rather scared of him,” Sands said. This is because Starmer is much more capable of teasing out the legal consequences of Brexit than the average Brexit-supporting Tory MP. Sands added: “It would be fun to watch if the stakes weren’t so very high.”

Starmer is a serious man and refused to be drawn on the character of his opponents. Instead, speaking slowly, as if weighing every word, he spelled out to me the damage they could cause. “The worst scenario is the government being unable to reach any meaningful agreement with the EU and [the UK] crashing out in March 2019 on no terms, with no transitional arrangement.” The result could be an economic downturn and job losses: “I don’t think anybody should underestimate the risks of getting this wrong.”

If Starmer seems pessimistic, it is because he believes time is short and progress has been slow. Since the referendum, disgruntled MPs have focused their attention on the final Brexit settlement. Yet if, as he argues, the starting position for our negotiations with the EU is wrong, the damage will have been done. MPs faced with a bad deal must either approve it or “risk the UK exiting the EU without a deal at all”.

It is this conviction that is driving his frantic schedule now. Starmer’s first month in the job is packed with meetings - with the representatives of the devolved nations, business leaders and his European counterparts.

He has also become a familiar face at the dispatch box. Having secured a commitment from David Davis, the minister for Brexit, that there will be transparent debate – “the words matter” – he is now demanding that plans to be published in January 2017 at the earliest, and that MPs will have a vote at this stage.

In his eyes, it will be hard for the Prime Minister, Theresa May, to resist, because devolved parliaments and the European parliament will almost certainly be having a say: “The idea there will be a vote in the devolved administrations but not in Westminster only needs to be stated to see it’s unacceptable.”

In Europe, Starmer said, the view is already that Britain is heading for the cliff edge. It was May’s pledge, that after Brexit the UK would not “return to the jurisdiction of the European Court of Justice”, which raised alarm. And among voters, there is “increasing anxiety” about the direction in which the UK is moving, he said. Even Tory voters are writing to him.

In the Labour Party, which is putting itself back together again after the summer’s failed coup, immigration remains the most vexed issue. Starmer told me that Labour had “earned a reputation for not listening” on the issue. Speaking on The Andrew Marr Show shortly after becoming shadow Brexit secretary, he said immigration was too high and ought to be reduced. But later that same day, Diane Abbott, a shadow cabinet colleague, contradicted him, publicly criticising immigration targets.

Starmer believes there is a bigger picture to consider when it comes to Britain’s Brexit negotiations. Take national security, where he warns that there are “significant risks” if communications break down between the UK and the EU. “Part of the negotiations must be ensuring we have the same level of co-operation on criminal justice, counterterrorism, data-sharing,” he said.

Crucially, in a Labour Party where many experienced politicians are backbench dissenters, he wants to reach out to MPs outside the shadow cabinet. “We have to work as Team Labour,” he stressed.

It’s a convincing rallying cry. But for some MPs, he represents more than that: a lone moderate in what can be seen as a far-left leadership cabal. Does he have any ambitions to lead Labour? “Having had two leadership elections in the space of 12 months, the last thing we need at the moment is discussion of the leadership of the Labour Party.” He has agreed to serve in the shadow cabinet, and is determined to stay there.

Starmer has found his purpose in opposition. “If we think things aren’t going right, we’ve got to call it out early and loudly. The worst situation is that we arrive at March 2019 with the wrong outcome. By then, it will be too late.”

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage