The Tax Wedge

Friday, 18 September 2009 07:27

Our resident accountant has just been analysing the effect of the current tax rates. Their most significant impact is of course at the margin. An unemployed single person receives about £200 a week in Jobseekers' Allowance, housing benefit, &c. Of that, about £20 a week is paid back to the government in tax, a nice example of churning, so the real purchasing power of the £200 is £180. If the unemployed individual starts working, the gross labour cost to the employer must be not less than £315 a week if the net pay is to be more than the amount received in benefit. In other words there is an employment tax surcharge of 57% on marginal labour. This figure used to be known as the Tax Wedge, but because economics has fashions, it is not a phrase that is heard these days. In terms of real purchasing power, the employer's burden is 71%.

Which helps to explain why some people are trapped in idleness and welfare dependency, while jobs are exported to places like China, India and Thailand - or don't get done at all.


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