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.

Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses