My mantra …
“Subsidise goods that use lots of labour.
Tax those that don’t.”
This has been a mantra of mine for the past 50 years.
Despite a research project funded by the European Commission, an article in the Guardian and letters in the FT, no government has taken this simple idea to heart.
The rationale is simple, if there is unemployment, there is spare labour . A good way to use that labour is to consume goods that use it. A policy that could bring this about is to “subsidise goods that use lots of labour and tax those that don’t”.
I proposed a change to VAT to do this: Raise the nominal rate of VAT but balance it by giving a rebate for every worker employed.
This scheme is designed to create employment at the bottom of the labour market, which by increasing demand will increase the lowest wages. It does this because the rebate is flat rate so has more impact on low paid work. (Example below.)
In the work funded by the European Commission economic modelling was done by Professor Kim Swales and Dr Darryl Holden of Strathclyde University. The report by Professor Swales said:
We find that the government can influence long-run employment levels by introducing an appropriate tax and subsidy system, even where the economy is working in a perfectly competitive way.
For those frightened by the word “subsidies”. These were not subsidies that should cause too much anger in free-marketeers. The “subsidies” in this scheme are tax breaks allocated on a uniform for-every-worker basis. Being tax-breaks they are never actually paid out by government, except in the unusual case where the tax breaks exceed the VAT which would have been paid. In correspondence HM Treasury has agreed these tax rebates are not government expenditure.
The scheme suffers from two adverse political sentiments. On the right, the use of the word “subsidy” smacks of big government. On the left, it is paying employers to pay low wages.
Well, the right should be happy that private enterprise is getting the incentive to create jobs and the left should be happy that the wages of the low-paid are raised because of increased competition for their labour.
Unfortunately, the report to the European Commission did not get much attention. Perhaps now, when other solutions for creating enough employment have been found wanting, could this proposal be one worth considering? I would like to know if there are good reasons for eliminating it.
A few week ago I had another letter in the FT about this proposal, “VAT rebate could help private sector job creation” (July 28th, 2020). To be honest, I had not expected it to be published, so I didn’t check and didn’t find out for a few weeks. There were comments asking for further explanation but, when I tried, it was too late to reply.
I wrote an expansion of the letter, as an opinion piece, but it hasn’t been published. Here, it is. If you do read it, please tell me why it shouldn’t be considered as a tool to get us out of this mess we are in.
The Pandemic changes demand
The pandemic will probably affect the pattern of demand in the economy for a very long time (“UK hospitality sector boosted by VAT cut”, July 8).
While support for current jobs may be a useful stopgap, several sources of employment will decrease or disappear. Keeping employment high will mean creating new work in different areas. Policies with the best chance of a quick success will be those that guide (or nudge) the private sector towards job creation.
A proposal to create jobs with tax breaks.
A few decades ago, I proposed a scheme that does this by giving a flat-rate rebate on VAT to employers for every worker they employ. Because it was flat rate, it has a disproportionate effect on the lower-paid, increasing demand for their labour, since they suffer the most unemployment. The scheme balanced the rebates with a higher nominal rate of VAT and savings on unemployment.
In the 1990s work was commissioned by the European Commission to model its effects. This was carried out by Kim Swales and Darryl Holden at the University of Strathclyde. The work indicated the scheme could succeed. However, it received little attention.
In the present crisis, perhaps this scheme is worth reconsidering. It reduces the reliance on economic growth for creating employment and could be part of a long-term redirection of the economy to allow our lives to be less stressful, better for the environment, and with a greater degree of equality.
Here are some points about the scheme: First, it incurs no extra government spending or borrowing; second, though the VAT nominal rate is increased, the total take falls due to the rebates and savings on unemployment; third, average prices of goods and services should fall, due to lower VAT take; and fourth, it would boost the wages of the lower paid by increased competition for their labour.
An example: doubling the rate of VAT
Here is an example for a doubling of the rate of VAT rate from 20% to 40%. This does not increase the average burden of VAT since the extra VAT is returned by rebates given for each worker.
VAT collected for year ending April 2019 was £132 billion at a VAT rate of 20%.
Assume doubling brings in another £132 billion.
If the rebate were given for the 27 million workers in the private sector, it would be £4889 per worker. Selecting some wage bands gives the following, before VAT is added:
- Low-paid workers earning £12000 are employed with a 41% reduction in costs.
- Average workers earning £24000 are employed with a 20% reduction in costs.
- High-paid workers earning £48000 are employed with a 10% reduction in costs.
- Pre VAT, capital employed receives no reduction in cost.
If enterprises continued the same patterns of working and pricing, these price changes of post-VAT output would follow:
- Enterprise using 100% capital would see prices rise by 17%.
- Enterprise using 100% high paid labour would see prices rise by 5%.
- Enterprise using 100% average paid labour would see prices fall by 7%.
- Enterprise using 100% low paid labour would see prices fall by 31%.
These changes in prices should encourage the purchase of goods and services that use labour. In this emergency that is what is necessary.
Production, artificial intelligence and climate change
In the 19th century Robert Owen predicted unemployment and a decline in the value of labour due to industrialisation:
“If we can imagine a point at which all the necessaries and comforts of life shall be produced without human labour, are we to suppose that the human labourer is then to be dismissed to be told that he is now a useless incumberance which they cannot afford to hire.”
What Robert Owen did not foresee is the increased demand for the “comforts of life”. This increased demand has generated extra production and extra jobs. In modern terms economic growth has created jobs.
In the long run, it may be possible for enough increased demand to stimulate enough production to have full employment. Holiday trips to Mars would give a very large boost to the global economy. But, as in previous times when machines have replaced human labour, there will be an uncomfortable lag causing serious poverty and unemployment.
At present, it does not seem clear how long this current transition phase will last.
Cheaper, happier lives
Need this be all doom and gloom? The pandemic lockdown has shown that there are some benefits to lower consumption. For commuters working in offices that have had the luxury of home working it has been a boon – at least for those with houses and gardens. Now the government wants to force you back to the daily commute to keep the urban economy going, by buying coffees at Starbucks.
Why not visit a coffee shop near your home?
Link to report to the European Commission: The employment effect of subsidies.
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