A living wage free of tax?

I’m glad to see, in this morning’s Observer, that Labour plan to make the national living wage part of the remit of the Low Pay Commission, and provide business with incentives to pay their employees in line with the level.

A thought has been going round in my head about the living wage recently though. The principle of it is that £7.20 per hour (£8.30 in London) is how much it takes for a family to provide for the basics of a decent life.

While making it part of government policy would be a good move, I can’t help thinking it a little silly that government would then, with the other hand, take some of that away in taxation, leaving those families on less than it takes to “provide them and their families with the basics of a decent life”.

So while having the living wage encouraged by government would be a good thing, there is something else I think government can do to help anyone not earning at least the living wage.

Raise the income tax level to £14,040.00 – the annual salary of someone working 37.5 hours per week on the national living wage.

This would save a married couple working full time at the living wage £3,918.4 per year. For a family who may be living off £24,161.60 per year that’s a huge help. That example is for those already earning the living wage, however. Think of all the people earning les than that and getting taxed on it – that’s where the phrase “squeezed incomes” really means something.

Of course what I’m suggesting here involves government giving up on a huge amount of revenue. So how might that be countered?

Fundamentally I believe the tax system is unfair. Politicians bleat about “fairer taxes” all the time but the biggest problem with the system as far as I’m concerned is differing rates. I believe charging people a higher rate when they reach a higher level of earnings is fundamentally unfair, however noble the intentions of redistributing wealth. Further, I blame that unfairness for much of the tax avoidance and evasion that so infuriates the general public (and understandably so).

Instead, I’d like to see a single flat rate for everybody earning over £14,040.00. I’m no economist so I can’t tell you what that might be (40%?) but it would have to help pay for the increase in tax free allowance outlined above. As companies would save on employer contributions due to an increase in the tax-free allowance, a rise in corporation tax to pay for it would be justifiable and would help pick up the bill also.

There’s my two peneth.

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