Wanna kick-start the economy? Bring in a Negative Income Tax.

 

No one, not even the most die-hard Tory, should be arguing that the British economy is doing well. Pundits are scarcely using the term ‘Greenshoots’ just in case they are jinxing the somewhat good signs that recent unemployment trends and minimal growth rates have shown. It was not that long ago that the Chancellor was blaming the poor economic statistics on the weatherman, or taking credit from his policies due to the Olympics frenzy. What remains unquestionably clear is that we are not out of the decaying economic woods just yet.

Oh, queue the tirades of: “cut more here, and cut that service – we don’t need that” from The Backbencher. But no, I won’t play to your fears – this time. Instead I want to propose something else: A Negative Income Tax (NIT).

So does that mean I want to raise taxes? Well, not quite. A NIT is a cash injection from the state into the bank account of a private sector worker. It acts as a buffer to the bank account and would give the receiver more disposable income – money which could be used to stimulate growth.

But I’m not suggesting we add a NIT to the current minimum wage; which is essentially an alternative way to introduce a living wage, and would be indirectly espousing Labour Party politics. No, tax and spend politics have not helped Britain and I don’t believe that they ever will, and chucking money at something with the hope of solving a problem does not work.

What I am proposing is a cut in the minimum wage, combined with a NIT to act as a subsidy to wages.

Canary wharf

Going by current Job Seekers Allowance (JSA) levels, the government could implement a conservative cut to the minimum wage to bring it down to £4.51 and use the money it would have spent on JSA (£71.70 a week for over 25s) to ensure that a worker’s earning levels do not fall below the current minimum wage (an even better policy would be to have a regional minimum wage rate). An 18-20 year old could be employed for £3.61 and not be any worse off with a NIT, and an under 18 could work for £2.30 and be just as well off under a NIT. The stock market is already up at the thought of it.

So even though the state has cut minimum wage levels, an employee will still earn £6.31 – the only difference is how the money is split. £4.52 would come from the employer, whilst £1.79 would be sent in from the government – even though that is a liberal approach to how much the state should contribute.

But what would it mean? Well first off, a lower minimum wage would imply that more people can be employed, as a company’s overheads would be lowered. Business wants growth, and in a competitive marketplace it could make a lot of sense for firms to take on more staff to improve output, efficiency, customer service – you name it. If that were to happen then more people would be earning and therefore spending more money buying goods and services which is essential for economic growth. Moreover, because of the reduced labour costs, product prices will fall, which would make it cheaper for consumers to buy goods and services – meaning that the government could at some point in the future reduce its subsidy.

job-centre

But furthermore this policy would give people back their lives. Studies show that working will make people feel happier (others that unemployment is horrifically depressing) as they have career goals, are earning, and most importantly achieving. That cannot be done if you are stuck at home trying to find work. Sure, a NIT would mean that people at the very bottom of the jobs ladder are not entirely self dependent, but as it currently stands, many people are wholly reliant on the state. It would also to be wrong to assume that workers will stay on the minimum wage throughout their working lives, and therefore, those who were once entirely dependent on the state will one day become entirely self reliant – thus removing the role of the state entirely.

And politically speaking this would mean that the welfare bill could shrink because less people would be requiring state payments in benefits to live their lives. At present, the welfare bill is twice as expensive as the NHS, so there is a definite need to look into how more people can get into work and off of benefits.

Currently, if you were to divide the level of earnings a person on JSA receives over a 40 hour week, they would be earning £1.79 an hour. It is not really very much at all. And we shouldn’t be content that people who are genuinely in need are living off of so little. What we should be doing is advocating ways which would get more people into work, improve the opportunities of many people, and finally get the economy moving – a NIT does exactly that.

If the government want to seriously get the economy growing, reduce the unemployment numbers, and give people more control over their lives then a Negative Income Tax is the solution for them.

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