Taxation and Jobs
23feb98: Professor Kim Swales1: Employment friendly VAT.
(Click here for full version)
Governments can influence employment levels with
an appropriate tax and subsidy system.
The policy we have considered involves a fixed labour
subsidy per worker, equal to 5% of the average wage,
financed by an increase in VAT. This tax/subsidy scheme
works by pricing workers into jobs and increasing the incentive
to work. The scheme stimualtes the low paid the most so the
policy has favourable distribution effect. Savings on
unemployment benefits reinforce the policy.
Governments are concerned about the overall level of taxation
and question the desirability of automatic subsidies. However,
the type of subsidy and tax plan outlined could be operated as
an integrated tax scheme in which the change in the firm's
tax is calculated as the difference between the additional VAT
and the per capita subsidy. As the scheme increases employment,
and so reduces the cost of unemployment benefit, there is a
reduction in overall tax. So the introduction of this
scheme would simultaneously increase employment and reduce
There is an increased faith in "market forces" and a desire
to reduce subsidies that artificially maintain inefficient
or inappropriate industries. However, where there are high
levels of structural unemployment amongst primarily low
skilled workers, long-term labour subsidies should be
considered. Such subsidies improve productive efficiency
by offsetting market failures in other parts of the economy.
They restore, rather than distort, appropriate price signals.
They do not rob the private sector of resources but
reallocate resources within that sector. Such subsidies
generate an expansion, not contraction, of private sector
If such subsidies can be packaged as tax rebates there we
have a simultaneous fall in taxation and increase in
(Precis of the summary of a report to DG5)
1Fraser of Allander Institute, University of Strathclyde
24feb98:David Chapman: Reforming the tax and benefit system to reduce unemployment
(Click here for fuller version)
Reforming the Tax and Benefit System to Reduce Unemployment
25 February 1998
Two reforms are proposed. The first is to modify the tax system so that it
produces a labour subsidy, but without cost in terms of extra tax. This is
done by simply making the employers responsible for paying each worker's
income tax and employEE's national insurance contributions, in just the
same way as they now pay the employER's NI contributions. Thus the
employers will in effect be receiving a subsidy per worker equal to the
value of one person's allowances on income tax and national insurance, that
is, a subsidy probably of about £35 per week This subsidy provides a strong
incentive for employers to spread whatever work is available among a
greater number of workers, that is, to employ the unemployed. Thus the
reform will increase not only the total number of workers employed, but
also the SECURITY of employment, for those workers who are already
The other reform is a new type of Earned Income Tax Credit, referred to as
the Work-Related Benefit scheme, which is designed to give a better deal to
the lowest earners, but in such a way as to avoid creating more of an
unemployment trap or a poverty trap. A person who earns a low amount per
hour, is given a benefit per HOUR OF WORK DONE, let us say up to 20 hours
per week. The lower is the hourly wage, the greater is the amount of
benefit given per hour. If the person does more than 20 hours of work, this
benefit is withdrawn, but at a lower rate, the lower is the hourly wage.
With a very low hourly wage, there is no withdrawal at all, and the person
keeps the whole of any extra earnings which they make.
The WRB thus enables the low-paid to obtain both a guaranteed minimum
income per hour of work, and a guaranteed minimum income per week. As
compared with a standard EITC, the WRB allows a higher AVERAGE withdrawal
rate to be used, without trapping the poorest into their poverty. Because
of this better targeting of benefit, and because of the saving due to its
greater reduction in the number of unemployed, the WRB scheme is likely to
be less expensive than a standard EITC, providing a greater guaranteed
minimum income, for any given welfare budget.
The two reforms are independent of each other--either could be used alone,
or they could be used together, for maximum impact on unemployment.
Democracy Design Forum
03mar98: Chris Hewitt: IPPR's Green Tax Reform package
In 1996, IPPR proposed the following set of changes to the UK
tax system over a period of eight years. The proposals were
modelled by Cambridge Econometrics and the results are summarised
below. Full details of the proposal are in the book Green Tax
Reform, by Stephen Tindale and Gerald Holtham.
The package is fiscally neutral and modelled between 1997-2005.
Main elements are:
The revenues produced are recycled in two scenarios:
- a commercial and industrial energy tax, applied to all forms
of energy at the point of end use, excluding household
consumption. The rate would be $1 per barrel of oil equivalent
in 1997, rising to $9 in 2005.
- a waste disposal tax, levied at £7/tonne in 1997 for landfill
and £2/tonne for inert waste landfill and incineration. Each
would increase by £2/tonne per year so in 2005 the rates would
be £25 and £18/tonne.
- an increase road fuel duties by 8% per year.
- a tax on quarrying, levied at £1/tonne in 1997, rising to
£9/tonne in 2005.
- a non-residential parking tax levied at £1 per week per
space, rising to £8 in 2005
- removal of company car tax perks, not a new tax simply a
one-off reform of current system
Scenario A - The Economists' Package
All revenues are used to reduce employer's National Insurance Contributions.
Rates would be reduced by 1.3% in 1997 and by 6.9% in 2005.
Scenario B - The Politicians' Package
This scenario is designed to make the reforms more popular by reducing three taxes:
- reduce VAT by 0.2% in 1997, finishing up with a cut of 1.7% in 2005.
- reduce business rates by 3%
- this still leaves room for employers' NICs to fall by 4.5 % by 2005.
CO2 emissions would fall by 9.5% more than the base case. The main
reductions are in road transport (19%), iron & steel (18%) and
chemicals (12%). Waste production falls by 16% in 2005.
The main economic impact is the creation of 717,000 new jobs by
2005, two-thirds of which are full-time. Job creation is less
using the 'Politicians' Package' but still 576,000 jobs are
produced. GDP and inflation remain virtually unchanged in both
How does this relate to the current debate on green taxes?
The package which we modelled is not necessarily the only way to
design green tax reform and any such reform would probably need
accompanying measures to make it politically feasible. In
particular, there are concerns that increasing road fuel duty
is regressive in rural areas and policies would be needed to
address those concerns. Similarly there is a small section of
industry who could suffer losses in competitiveness from an
industrial energy tax. These energy intensive industries may
need special treatment to help them adapt to a green economy.
IPPR is currently undertaking work in both of these areas.
At the time of writing , the government is reviewing the landfill
tax and consulting on the case for an aggregates tax. The Budget
may will develop the Treasury position on each of these green
taxes. Company car taxation and non-residential parking taxes
are also under discussion as part of the integrated transport
policy review. A White Paper is due in May.
25feb98a: Kim Swales: The New Deal - Smoking without inhaling.
The UK has a schizophrenic attitiude to labour subsidies.
Whilst politicians deride labour subsidies as not providing
proper jobs, they are, in practice, addicted to them. Over
the last two decades numerous schemes have been introduced
that subsidise labour: YOPS, YTS, Employment Training,
Employment Action, Action For Work, amongst others.
Unfortunately these schemes have been temporary, selective
and narrowly targeted to specific disadvantaged groups.
This has made them difficult to administer and unlikely to succeed.
They may have been cheap in terms of exchequer cost but they
have been expensive in terms of real effectiveness. However,
the politician's intuition is correct about the positive
impact that labour subsidies could make, but labour subsidies
should be introduced in a much more systematic manner. At
present, like Clinton, we smoke but don't inhale.
Is the New Deal any different?
06nov98:Geoff Beacon: Employment through Tax Breaks
Employment through Tax Breaks
(A note to the Fabian Tax Commission)
Geoff Beacon, 6th November 1998
This note to the Fabian Tax Commission is mainly to
introduce a proposal by Kim Swales and myself for
the use of broadly targetted tax breaks that act as
labour subsidies to the lower paid in order to tackle
the problems of unemployment and inequality. We have done
some work, under a grant from the European Commission
which shows that governments can influence long-run
employment levels by introducing appropriate tax
But this is one example of using the taxation system
to encourage desirable outcomes and discourage
undesirable ones. This general approach could be
used more often. It certainly has some political
1. "Government expenditure" becomes "tax reductions".
2. "Taxpayers" not quangos make the decisions.
3. Little bureaucracy is needed.
4. They have a short lead time.
5. They use the "neutral" market.
For example, proposals for lower taxation on beer from
small breweries is not seen a subsidy; tax breaks
on gifts to the arts are not questioned with the same
ferocity as Arts Council grants.
Much of the material for this note comes from postings
I made on the "Third Way" internet debate hosted by
PROPOSAL - EMPLOYMENT THROUGH TAX BREAKS
The specific policy package which Kim and I considered
involves the introduction of a fixed per capita labour
subsidy, paid as rebates on VAT payments financed by an
increase in nominal VAT rates. (The details of the scheme
can be seen in the report to the European Commission. It
is available on www.faxfn.org.) The scheme works through
market forces by allowing for some substitution of capital
for labour, but more generally by pricing workers into jobs
through subsidisation and increasing the incentive to
work, especially amongst lower paid workers.
The type of subsidy and tax plan that we outlined is
operated as an integrated tax scheme in which the
change in the firm's tax bill is calculated as the
difference between the additional VAT and the per capita
subsidy. The scheme increases total employment,
and reduces payments of unemployment benefit, it
allows a reduction in the overall tax rate for most firms
and the economy as a whole. We can actually say
"This scheme increases employment and so reduces the cost
of unemployment benefit: There is a reduction in overall tax. So
the introduction of this scheme would simultaneously increase
employment and reduce taxation."
Our proposals seem to have had some acceptance in the European
Union. Here is a paragraph from the Extraordinary European
Council Meeting on Employment in November:
"68. - examine, without obligation, the advisability of
reducing the rate of VAT on labour-intensive services not
exposed to cross-border competition."
A copy of the report to the European Commission is appended.
To avoid any possible misunderstandings (like some in the
nexus debate) we do not claim that switching taxation from
payroll taxes to consumption taxes (eg VAT) by itself would
lessen unemployment. At the risk of being too informal can
I say that the main mechanism of our proposal is to "subsidise
goods that use lots of labour and tax those that don't". A
secondary mechanism is to make the production of particular
goods or services become more labour intensive. Both of these
are substitution effects which create jobs where
they are needed: at the bottom end of the labour market.
THE CURRENT EMPHASIS IN JOB CREATION - TRAIN AND EDUCATE.
The nexus "third way" debate, started by the Prime Minister,
discussed topics that might find some middle ground between the
inequality that characterises the North American economy
(where welfare benefits are less supportive) and the
unemployment that is said to be the product of the more
comfortable safety net in Europe. Some political theorists
believe that by training the unemployed they will be
able to find useful jobs. This will cut unemployment.
But how does education and training increase employment? Train
a million hairdressers and we do not create a million jobs. I
know a good education can help my kids get good jobs. But is this
simply pushing them up the jobs queue (ie. They will get the
jobs that other kids will not get?) Training may help us
compete for jobs on the world market, but this is less
effective on a European scale because we are attracting the
jobs from France, Spain and Germany etc.
In one contribution to the Third Way Debate Thomas Lunde gave
his answer to the hairdressers' question:
"The same is true of skills. If 10,000 printers are
required in the market and you have trained 12,000
printers, you still have 2000 printers unemployed so
skills training has the double effect of redundant
training expenses and surplus labour driving down
the wages of those employed." (www.netnexus.org)
So some of the 2000 printers will get jobs because the
wages for printers have been forced down. In another
context Kim Swales answered this point: "... training a
million hairdressers would create jobs by cutting the wages
in hairdressing through competition. A further increase
in employment would occur if standards were raised and
we had our haircut more often, foregoing expenditure
on less labour-intensive goods."
I think Kim meant this partly as a reducto ad absurdum:
we both feel that other proposals, which involve tax breaks
rather than goverment spending financed by large amounts of
taxation can have a more direct effect.
In addition, I have particular worries about the effectiveness
of current education and training which is unconnected with the
theoretical effect on employment. These have been fostered by
postings sent to www.faxfn.org. Some of these indicate a very
serious disenchantment with current experience of training
from the points of view of trainees and employers.
Areas of concern include nursing, mechanical engineering,
civil engineering, building trades, media studies, civil
engineering, sports science and linguistics. One constant
theme is that for training to be effective it must be
on-the-job training and, of course, on-the-job training
requires the trainee to have a job.
Perhaps on-the-job training should start before a degree.
As one posting from a small businessman starts:
"I have employed many college, university
and TEC graduates and have found that they
are generally institutionalised, overeducated,
one-dimensional characters who for the main
part have a chip on their shoulders because
they feel as graduates they should
automatically be placed at a management level.
However, in reality, this is rarely the case.
Such comments may appear emotional and "off the
wall" but his concerns ought to be addressed by
our education and training industry. The second
quote is from a Senior Lecturer in Community Nursing:
"How, as an employer, can we employ
a student whose only knowledge of his
or her chosen career is theory based
with the exception of a 2 week placement
in a remotely related field.
"The students are taught by desk bound
individuals whose knowledge is also
theory based who have dipped their toe
into the workplace only to decide it
was actually hard work and actually they
knew nothing and in a state of panic
returned to the bosom of the education
system to become tutors and lecturers.
"How can industry take these people as
serious candidates for management posts.
Many of them have been institutionalised
by being in education until they are 19,
20 or 21 and have the social skills of a
caterpillar. Can they manage an iron on
a uniform? Can they manage to stand close
to the razor? All they seem to be able
to manage is to go home."
Education and training: the view from a small business.)
"The route taken has, however, been to
make nursing more academic moving up
from certificate to diploma and degree
level and courses have moved from the
Colleges of Nursing to Universities,
often with the same teaching staff but
with their emphasis now on university
objectives where research has a greater
role than training. Unfortunately this
process has largely removed a vital
ingredient from nurse training -
An additional worry is that training seems worse in Britian
than in Europe, particularly associated with the switch from
apprenticeships to degrees. (See Peter Rook:
Graduates educated to manage the dole office.)
But as Wim van Welzen, MEP points out in his more heavyweight piece
Training without jobs is pointless
the basic problem is the same in Europe.
"The change to an academic bias has
caused other problems. Many students
starting nursing courses are finding
that more book learning is not what
they expected and is not what they
like so the drop-out rate on some
courses is enormous. And because of
the nature of the block grant received
by universities, this drop-out rate
does not affect funding. Courses in
nursing are lucrative."
(Nurse E: Senior Lecturer in Community Nursing:
The Profession of Nursing)
Some of the current difficulties in training and education
may, in the long run, be improved by government initiatives.
Employment may actually be increased. But, the situation seems
urgent enough to consider other remedies, including ours,
which create employment at the bottom end of the labour
market through changes in taxation.