The connections between tax credits, wage rates and corporate taxes…

Corporate welfare should be viewed in-the-round

One of the criticisms made of The British Corporate Welfare State was that wage subsidies do not function as corporate welfare.  The evidence on the effects of wage subsidies is, indeed, mixed. But the relationship in the real world (as opposed to the theoretical or even empirical micro-based economic simulations) between tax credits, wages and corporation tax is clear. And it has been made clearer still by the government’s own policies.

The Conservatives have long opposed the idea that the state should subsidise wages. Better to allow the market to determine wage rates. But in a world in which the minimum wage already exists, and a growing social security bill, the Government made a decision to tackle the problem by first cutting tax credits and second by increasing wages at the lowest end. Together, the moves would potentially reduce state expenditure. However, in order to ‘sell’ the policy to employers, the government has also had to promise substantial cuts  to corporation tax and employers national insurance. Businesses are likely to gain a great deal from the changes. They are also being incentivised to take advantage of the cuts to corporation tax and invest in machinery and other labour-saving devices – hardly sensible at this time. A government ‘spokesperson’ was quoted by the BBC as saying:

“To help with the transition we are reducing taxes and employer national insurance contributions over £3bn a year in total by 2020 through changes to the employment allowance and lowering corporation tax to 17%. . . . These measures will benefit over a million businesses.”

Taken together, it is not clear whether the Treasury will save very much at all. But it is clear from projections by the IFS and others that the main costs will be borne by the low paid who are set to lose more from the changes in tax credits than they are to gain from the new ‘living wage’.