Changing VAT to create jobs
In the 1990s I persuaded the European Commission to fund some work on economic modelling on a proposal to change Value Added Tax so that it lowered the cost of employing labour. The work was carried out by Kim Swales and Darren Holden of the University of Strathclyde, with a more thorough approach than work I had previously published. The final report can be found here. Professor Swales summarised the work thus:
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 stimulates 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 taxation.
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 economic activity.
If such subsidies can be packaged as tax rebates there we have a simultaneous fall in taxation and increase in employment.
A carbon tax to create jobs
Earlier postings show that climate change is worse than governments like to admit. Even the Intergovernmental Panel on Climate Change (IPCC) is underestimating its effects (see Committee on Climate Change discounts important science). That said, one brave politician, Julia Gillard, the Prime Minister of Australia, is proposing a tax on carbon emissions – an interesting, but little reported fact, is that the British Prime Minister, David Cameron has written to her in support.
There is much opposition in Australia to a carbon tax and a argument that is often put forward is that a carbon tax will destroy jobs. It may be the case that there will be some job losses in carbon intensive industries but it is quite possible to design a system, like the one described above to change VAT to create jobs, which directly targets unemployment.
Such a scheme to tax carbon emissions and subsidise labour would divert consumption from carbon intensive goods into those that were more labour intensive.
It would create jobs and begin the process of combating climate change.
P.S. Prior to the work by Proffessor Swales, I had published a simpler paper Employment creation with very large scale labour subsidies with Peter Monk.
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