Labour is planning a policy to tackle high pay. As the Guardian reports:
The full Labour manifesto, to be published on Tuesday, will include a proposal that aims to disincentivise excessive pay by charging companies a 2.5% levy on earnings above £330,000 and 5% on those above £500,000.
The rates mean that companies will have to pay £4,250 extra for every worker receiving £500,000 in pay and perks. For a person earning £1m a year, that would rise to £29,250.
My obvious question is to ask why the timidity? Quite a number of years ago I wrote a policy for the TUC on this issue, which was adopted, which suggested that any payroll cost above ten times UK median pay (now just over £28,000 a year) should be disallowed for corporation tax creating an effective 19% levy on that excess at current rates. I still think that worthwhile and fair. There are three reasons.
First, this does not act as a disincentive to enterprise: the levy does not apply to profit distributions. Claims to the contrary are nonsense, and that will also be true of Labour's policy, as are the comments that follow.
Second, high pay of this level does not represent a reward for effort. It does instead represent the ability to capture a rent. In economic terms this is the equivalent of monopoly profit arising from a market imperfection. So, footballers benefit from the rent arising from there being only a very few TV channels. Bankers benefit from the advantages that regulation provides: a tiny number of organisations can really partake in most banking markets and they exploit that to their advantage. Their staff have captured part of that. Top paid directors in FTSE companies have formed an effective cartel amongst themselves o demand enormous rewards from which there is little evidence of benefit to their companies. And so on. The excess tax is then a tax on that ability to exploit for gain implicit in the high pay.
Third, there is a need to reprice this pay to beat inequality which is now widely considered to be the cause of massive social harm as well as economic stagnation. The social harm aspect is, I hope, obvious. The stagnation comes from those very well off spending on asset price inflation (or saving, in other words) rather than recirculating income into the economy as those in lower pay do.
So the policy is needed.
I would increase the cost and at lower pay.
I would add that we also need to look at the whole issue of economic rents appropriately. This (and the need to eliminate economic distortion) is what justifies a financial transaction tax.
This too is what justifies higher corporation tax charges for larger companies. The limited liability they enjoy is effectively a rent they should pay tax on.
And this would, of course, justify higher personal tax rates on investment income which, even after recent dividend and rental income changes, do in most cases have tax rates lower than those on going out to work for a living, which is absurd.
Labour is making a move in the right direction. It will need to go further though.
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What is interesting to me about the headline proposal is that Labour are overtly acknowledging that high taxes disincentivises high earnings. So they expect behaviours to adjust and would like to have fewer high earners as a result.
While the outcome is the same, the attitude is rather different to the view of say the Adam Smith Institute that high earnings are welcome if the market says you merit it, but will be taxed progressively.
You are wrong
This is not a penalty on profit
It is a penalty in rents
Did you deliberately miss the point?
Excellent point on the rent/monopoly implications. I guess most of us implicitly assume this to be the case, ‘jobs for the boys’ in the City’ for instance, but it’s good to see it explicitly stated.
This is a common-sense policy.
I have no problems with the morality of any of this but I think that the timing of this policy announcement is wrong.
This is one of those polices that on its own merits is worth it but it is vulnerable to being portrayed in the narrative of Labour/Left bashing high earners.
I would have left this policy for after an electoral win (sorry if that makes me seem dishonest but there you go).
I also think that the real winning policies with voters are those that actually do something for those that are already struggling. So Labour’s proposals for more social housing are spot on for example and the raising of the minimum wage.
From discussion I’ve been having with people the last 2-3 years, my observations are that it is hard for those struggling to see how tackling unjustified high pay translates into something that benefits them directly (given how much misinformation about how the economy works is out there). I pick up that people who are genuine Labour voters are not interested in other people’s pay – they are preoccupied about the low level of their own.
There is of course a section of the population out there who seem ripe to have their resentment whipped up for those in the public sector who have decently paid jobs because they feel the public sector has let them down (due to Government under investment etc.,).
I find that this group does not care about high flyers in the private sector at all either. Their jealousy has been funneled at people who are not that much better off than themselves to the point where when you ask them how would they feel if it was one of their own family members who would be having a wage drop or a much more poorly paid public sector job they just go quiet because they have not thought about a family member working in the public sector at all! AT ALL!
Perhaps the policy – and others – is intended to give the labour party that electoral victory you mentioned.
It would certainly hope that the policy is designed to do this John but already the naysayers are jumping in.
This adds to the problem of these quite rightful policies being accepted by the right number of people on June 8th.
Sorry – I pressed the submit button to early on my contribution.
I still think that when it comes to policies of redistribution therefore, Labour has to be very careful indeed about how it justifies this.
Not only is it hard to see how such policies benefit the individual voter, we also have in our society a constant narrative of what I would call very clumsily ‘self aggrandising wealth worship’ which rather than turning people off actually seems to foster an acceptance of wealth disparity (they must deserve it!).
There also an element of aspiration where people project themselves into that wealth (through the use of social media). This results in people being less judgemental about other’s wealth and effectively stunts any concept of redistribution being formed or considered.
It means that in people’s minds, wealth (and wealth disparity) becomes more acceptable because we are all meant to be seeking it. It is the new collective objective, the modern ‘Gesellschaft’ of British society – not redistribution.
Found this on the Social Europe website this morning.
https://www.socialeurope.eu/2017/05/time-biggest-fair-tax-reform-european-history/
Thanks
Surely the largest rent seeker is the financial sector. Bill Mitchell refers to the Tax Justice Network in his blog today in this regard:
‘The thesis the Tax Justice Network authors develop is that:
Countries overly dependent on an outsized financial sector display similar characteristics. Britain, whose financial sector is the world’s third largest, and the largest by a composite measure of size and interconnectedness, is a case in point.
This massive financial centre:
1. “crowded out manufacturing and non-financial services”.
2. “leeched government of skilled staff”, not to mention other sectors.
3. “entrenched regional disparities”.
4. “fostered large-scale financial rent-seeking”
5 “heightened economic dependence”.
6. “increased inequality”.
7. “helped disenfranchise the majority”.
8. And to top it all off “exposed the economy to violent crises.”
What is the worry if they all pack up and go then!’
Bill has the right end of this stick
I agree, excess pay is a signal of market failure. The Chicago school economist Henry Calvert Simons who was an advocate of competitive markets said that for any particular market to operate effectively no one should control more than about 5%. So unless there are at least 10 providers of football on TV, 10 banks, 10 energy providers, the market does not work efficiently and we see monopoly pricing and monopoly pay.
In contrast, if the government pays excessively we can vote for a new government.
@ Richard
What are you thoughts on the BBC’s summary of the Labour manifesto
“Jeremy Corbyn is taking the Labour Party in this election to a very different place – away from the recent consensus that the UK should be moving to lower borrowing, and lower taxation.
The manifesto spells out a vision, for good or for ill, of more spending, more tax, and more borrowing.
And in a big way.”
Also, the IEA has their own take too (quite similar to the BBC)
https://iea.org.uk/media/labour-party-manifesto-pledges-would-impose-largest-tax-burden-since-the-1940s/
For good, I say
See blog now posted
What do you think to the Ifs comment that Labour,s manifesto will give us the highest percentage tax take for 70 years.
I think they are wrong. Any thoughts?
Comments now posted
You say at the start of this article that you would disallow salary costs for corporation tax purposes above a certain threshold as it would act as a levy and be disincentive to high pay. However, on 11 May, you said that all the managers you speak to all say they never consider the corporation tax treatment for the company when setting pay levels. How can it be a disincentive if it is never considered?
They would if they were the managers involved
Why? Corporate tax is a cost of the company on your analysis of 11 May. You also have said managers are under no duty (legally or practically) to maximise profits and shareholder returns. So why would they exercise pay restraint on their own pay but not when it comes to the pay of their staff. History tells us the opposite doesn’t it? You have made it clear that corporate tax increases do not impact on wages.
I have never in my life said CT is a cost of the company
And you’re a pedant that takes one example and extrapolates it out of range
Your time here is over. I really don’t like trolls
I see you lack the balls to post my comments on your woefull analysis of football players and TV. Quite appropriate
I don’t invite people of your uncouth demeanour into my house
Or my blog