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A living wage can be achieved by raising tax thresholds to minimum wage levels.

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The Living Wage Foundation campaigns to have UK employers pay their staff more than the minimum wage that is set by law.  Their campaign is not to change the law, but to encourage or to pressure employers into voluntarily paying higher wages than the legal minimum.  Their claim is that the current minimum wage of £6.19 per hour is insufficient for a decent standard of living, which they say requires £7.45 per hour in the UK outside London, and £8.55 within London itself.

There is certainly a good case on moral grounds for raising the incomes of the lowest paid and giving them access to opportunities currently denied to them.  There might, however, be some problems associated with a campaign to have this brought about by the voluntary actions of employers.  It might mean that those who paid the ‘living wage’ became less able to compete on costs with firms that did not.  It might, by raising wage costs, encourage the spread of automated replacements for labour, thereby reducing the number of low-paid jobs available.  It would raise the prices of whatever goods or services the employers were producing, meaning that customers, including those on modest means, would end up paying for it.

The Adam Smith Institute has what it believes to be a better idea, and has campaigned for over a decade to have it implemented.  Our proposal is to raise the income tax threshold to the level of the minimum wage, taking the lowest paid out of taxation altogether.  It seems bizarre, but the government, having set a minimum wage, then takes income tax from those who earn it.  Sometimes it then has to give benefits to them to make up their income again.  If people on minimum wages were exempt from income tax, their income would rise to within pennies of what is advocated by those who support a minimum wage.  Furthermore, the funds would come from the Treasury, not from employers, and could be paid for entirely by cuts in government spending.  It was the Liberal-Democrats, not the Conservatives, who inserted a pledge into the coalition document to raise the threshold to £10,000 during this Parliament.  Its current level is £8,105, rising this year to £9,205.  Bravo, but the minimum wage level would take it up to just over £12,500, so there is some way to go.  Our simple dictum is that people on the minimum wage should not be paying income tax.

An advantage of the ASI proposal that might prove attractive to the government is that a commitment to implement this would achieve a ‘living wage’ and shoot Labour’s fox in the process.

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