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Pop! - No More Tax Credit


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:lol: So far from the real world.

This is the problem with trying to post coherent arguements on here rather than the usual left wing spam, there's an aweful lot of anti-capitalist wanabe Citizen Smiths ready to flame you one way or another.

TBH I can't be bothered anymore and find that most of the better informed posters can't be bothered either.

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:lol: So far from the real world.

I like Smyth's world. It's got unicorns and mermaids.

Smyth, do you really believe that tosh? So, the big queues for a job in Lidls have no impact on the wage the company can offer? And, having selected a candidate - struggling with this - the companies go "well, if unemployment was low, we'd have to pay £x, so we'll pay that now even though we don't have to"?

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This is the problem with trying to post coherent arguements on here rather than the usual left wing spam, there's an aweful lot of anti-capitalist wanabe Citizen Smiths ready to flame you one way or another.

TBH I can't be bothered anymore and find that most of the better informed posters can't be bothered either.

I consider myself a capitalist amongst other things, and surely even pure capitalists will happily admit that increased competition for jobs lowers wages, and increased competition for labour raises them. Smyth seems to be ignoring unemployment and unskilled workers (who are largely interchangeable) when he uses the term 'worth'.

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I suspect that you'll find that:

Most minimum wage workers don't qualify for tax credits;

most of those that do qualify are are working the minimum number of hours required;

they could easily be replaced by non-qualifying workers if needed.

I suspect that without tax credits the hourly wage would actually fall as more people looked for 40 hours/week work rather than 16.

Nope.

According to this:

http://www.ifs.org.uk/bns/bn69.pdf

the introduction of tax credits increased the number of hours worked, and the number of single mothers participating in the labour market.

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I consider myself a capitalist amongst other things, and surely even pure capitalists will happily admit that increased competition for jobs lowers wages, and increased competition for labour raises them. Smyth seems to be ignoring unemployment and unskilled workers (who are largely interchangeable) when he uses the term 'worth'.

I do too, and when I've voted I've only ever voted Tory. I guess I've been 'turned'

Sadly Tories only believe in capitalism and free markets when it enriches them. When it doesn't they are more than happy to intervene like any Statist dictator, hence bank bail outs and help to buy.

Also the Tories could reform tax/benefits and reform land ownership to make work pay but they don't of course, as they need an 'underclass' of single mums etc to ridicule and blame for their total economic and moral failure.

Their only hope for the next election is to conduct an insane and divisive class war. I suspect we will see a lot more 'Smyth' like comments on forums like this, to change opinions, especially as no one trusts the MSN anymore.

Edited by aSecureTenant
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Working families tax credit was abolished in 2003, any chance of a link to similar for the current system.

yes, google Hard Working families Tax Credit.

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Immigration can reduce wages (and prices!) if immigrants are disproportionately working in a particular industry/sector because it adds to labor supply in that sector, but tax credits dont, they are completely different things.

Suppose that a worker is worth £7/hour to a company, in terms of the value they produce. Ignoring short term frictions, the wage for that worker will roughly be set at £7/hour. Now tax credits come in, and the worker is getting (say) an additional £2/hour paid by the government. Your argument is that the company will now cut their salary by £2 and drop it to £5/hour to compensate. But that doesnt make sense, because the guy's work is still worth £7/hour, so if the company tries to underpay him then they are now making a free £2/hour pure profit from his work. Since companies compete over workers, this means that it will be profitable for another company to instead offer the same worker (eg) £5.50/hour, since they are still getting £1.50/hour of essentially free money. But then another company will then offer £6/hour since they are still getting £1/hour of free money, and so on. The equilibrium wage for the work is still £7/hour, the tax credits have changed nothing.

That's nonsensical.

Companies don't pay workers according to the value they produce. They pay them according to what it costs to buy a worker in the market place.

The value to the company is only relevant insofar as the job exists at all.

Let's say you own a sandwich shop. You would like to expand. You know that if you can employ people at £7/hour or less, the shop will probably succeed. If you can't, then it will go bust.

Tax credits distort the labour market, because whereas the £6/hour on offer is not attractive, net of tax, child care, etc., when you add on tax credits it is.

Let's just do the sums:

Working Tax Credit (work element) £3930

Working Tax Credit (child care, 2 days a week) £2548

Minimum wage for 16 hours £5250

Employer's NI payable: nil

That worker receives in tax credits, wages, and child care £11,728/year, or £14.10/hr.

The company pays only 45% of the cost of that.

Now let's say you employed someone full-time

Professional, no children, £29,328 gross per year (equivalent to £14.10 hour), or

Income tax: £3865.60

Employee's NI: £2564.64

Employer's NI: £2949.34

Now the cost of employing this person is £32,277.34

and they receive £22897.76

So:

Worker A on minimum wage, receives wages/benefits totalling £14.10/hr at a cost to his employer of £6.31/hr

Worker B on ~£30k, receives wages/benefits totalling £11.00/hr at a cost to his employer of £15.52/hr

Very clearly the market is massively distorted.

The argument that tax credits lower salaries by expanding the labour pool (by incentivising people to work) is more interesting, but a general expansion in the labour pool doesnt decrease salaries, otherwise a country with a population of 50 million would necessarily have a lower average worker salary than a country with a population of 5 million people, which is obviously nonsense. See http://en.wikipedia.org/wiki/Lump_of_labour_fallacy for why this analysis is wrong. Salaries can only be reduced due to labour pool expansion if the expansion is concentrated in a particular industry, and salary decreases will only occur in that industry (eg importing a lot of doctors will reduce the salary that doctors get, but importing a bunch of workers spread across all industries cannot cause a society-wide salary drop).

As I said above this is more about expanding employment. Companies like Domino's, which have begged the government for more low-paid labour, are not viable above a certain hourly rate. At present, thanks to an economy where there you are much better off in unskilled employment in social housing than being lower middle class on an above-average salary of £30k/year scrabbling about trying to complete for housing in the market, companies like Dominos have expanded rapidly. If they cannot get the cheap labour they will not open those branches.

Clearly tax credits encourage the creation of unskilled jobs, the reward for which accrues to the capitalists (i.e. company owners). So what you get is that people in the middle are paying tax which ultimately accrues to the bottom line of low-paid employers.

And in the midst of all this young people are being pushed off to university to study for jobs that won't pay enough to allow them access to the housing market, and which are over-taxed by a government which prefers to encourage low-paid work.

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I consider myself a capitalist amongst other things, and surely even pure capitalists will happily admit that increased competition for jobs lowers wages, and increased competition for labour raises them. Smyth seems to be ignoring unemployment and unskilled workers (who are largely interchangeable) when he uses the term 'worth'.

Something he addresses in the final paragraph as follows:

The argument that tax credits lower salaries by expanding the labour pool (by incentivising people to work) is more interesting, but a general expansion in the labour pool doesnt decrease salaries, otherwise a country with a population of 50 million would necessarily have a lower average worker salary than a country with a population of 5 million people, which is obviously nonsense. See http://en.wikipedia.org/wiki/Lump_of_labour_fallacy for why this analysis is wrong. Salaries can only be reduced due to labour pool expansion if the expansion is concentrated in a particular industry, and salary decreases will only occur in that industry (eg importing a lot of doctors will reduce the salary that doctors get, but importing a bunch of workers spread across all industries cannot cause a society-wide salary drop).

So there's a substantial argument that immigration can suppress wages at the lower level if the immigrants are predominantly competing against low skilled workers but we're talking about tax credits.

It is possible that tax credits could supress wages by expanding the supply of labour but I think there're arguments either way. They may have encouraged some workers into the market who would otherwise have stayed at home but likewise they strongly encorage part time work, so the question is does the extra 16 hours from some people offset the lost 24 from others?

One other point: it makes no difference to Tesco or virtually any other min-wage employer what the wage rate is. In a competetive market the benefit of any reduction in wages will very quickly be passed onto the consumer, Tesco will end up making the same profit at £5/hour, £7/hour or £10/hour so long as everyone else in the same industry is paying the same rate.

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Working families tax credit was abolished in 2003, any chance of a link to similar for the current system.

Well I think the point was that they studied the effect on the labour market when it was introduced. You can hardly study the effect on the labour market now, because the labour market has been distorted by it for 15 years (and the successor benefit is basically the same thing). The only useful studies are those after introduction.

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I suspect that you'll find that:

Most minimum wage workers don't qualify for tax credits;

most of those that do qualify are are working the minimum number of hours required;

they could easily be replaced by non-qualifying workers if needed.

I suspect that without tax credits the hourly wage would actually fall as more people looked for 40 hours/week work rather than 16.

I don't know if it would fall but it would certainly not rise. To employers it generally doesn't matter a damn if you have to live in absolute poverty to survive on the wages they pay. That is your problem not theirs. If they can get someone to accept that wage then that is what they will pay.

Tax credits are simply a way for the government to avoid the hard questions on what companies pay. i.e. If the "free" (meaning biased towards capital) market, means that people end up living in extreme poverty despite working, then should we not intervene and alter how the market functions? So in some way forcing companies to pay more? No that's difficult. We'd have to take on a heck of a lot of VI's, and it means admitting the market is not infallible when it comes to setting wages. Lets just subsidize the workers instead.

The same argument is going on right now in the U.S. The incomes of their poorest workers is falling in real terms, so some republicans are suggesting that they copy the U.K.'s tax credit system instead of raising the minimum wage. i.e get other taxpayers to pay a subsidy instead of shifting the burden to where it should belong - employers.

Edited by alexw
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The same argument is going on right now in the U.S. The incomes of their poorest workers is falling in real terms, so some republicans are suggesting that they copy the U.K.'s tax credit system instead of raising the minimum wage. i.e get other taxpayers to pay a subsidy instead of shifting the burden to where it should belong - employers.

Its not a bad argument, however the burden should fall on corporate taxation, however that burden is falling, and is effectively being offshored.

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That's nonsensical.

Companies don't pay workers according to the value they produce. They pay them according to what it costs to buy a worker in the market place.

The cost of buying a worker is based on the marginal productivity of the worker, thats the point. Where do you think salary differences between jobs come from? Why do engineers get paid more than cleaners (equivalent; why does it cost more for a company to 'buy' an engineer than a cleaner)? Why do good engineers get paid more than mediocre engineers?

Let's say you own a sandwich shop. You would like to expand. You know that if you can employ people at £7/hour or less, the shop will probably succeed. If you can't, then it will go bust.

Tax credits distort the labour market, because whereas the £6/hour on offer is not attractive, net of tax, child care, etc., when you add on tax credits it is.

What does 'not attractive' mean? In the absence of large welfare state which allows people to choose not to work and live off others, then the worker either takes the £6/hour on offer, gets a job elsewhere paying more than £6/hour, or starves.

Whether the worker can get more than £6/hour elsewhere is a direct function of his productivity (which is itself determined by his skills, intelligence, experience, etc). A trained engineer for example would be able to get paid more than this at engineering firm, and so would not be willing to work in a sandwich shop for £6/hour. However someone with no skills would struggle to find better options, and so £6/hour might be the best they can get. In this case, the worker is only 'worth' £6/hour, in the sense that noone is willing to pay them more than that. A person can believe they are 'worth' £20/hour just like a person can believe their 1 bed flat in a ghetto is worth half a million pounds, but unless they can find someone actually willing to pay them that then who cares what they think?

If there is any distortion here then its caused by unemployment benefits rather than tax credits, since it allows people to choose not to work at all.

Edited by Smyth
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I like Smyth's world. It's got unicorns and mermaids.

Smyth, do you really believe that tosh? So, the big queues for a job in Lidls have no impact on the wage the company can offer? And, having selected a candidate - struggling with this - the companies go "well, if unemployment was low, we'd have to pay £x, so we'll pay that now even though we don't have to"?

It is the only way he can justify his own self-worth to himself as an ex-banker. i.e. "I got paid that because that is the value I added". To accept otherwise is to self-shred his own sense of self-worth. He doesn't have the strength to do that, but then admittedly, very few of us do. Usually we only accept such things because we are so smack-bang confronted with them, that that conclusion is inescapable, and we have no other choice but to accept them.

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Immigration can reduce wages (and prices!) if immigrants are disproportionately working in a particular industry/...................

Suppose that a worker is worth £7/hour to a company, in terms of the value they produce. Ignoring short term frictions, the wage for that worker will roughly be set at £7/hour. Now tax credits come in, and the worker is ge.........

Companies compete over workers. If a worker is being paid substantially less than they are producing (marginally) then another company w........

The argument that tax credits lower salaries by expanding the labour pool (by incentivising people to work) is more interesting, but a general expansion in the labour pool doesnt decrease salaries, otherwise a country with a population of 50......

TL:DR

I think tax credits indirectly lower wages, (thus subsidising business) in the same way that housing benefit sets the lower limit of the price of renting (thus subsidising BTL)

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That's nonsensical.

Companies don't pay workers according to the value they produce. They pay them according to what it costs to buy a worker in the market place.

Quite, and much better put than my rather incoherent ramble further back. To put it another way, companies pay what they can get away with.

Fine for a banker regarded as talented or for when they want Samuel L. Jackson to do a voice over - these are people who, for one reason or another, are valued. It's not so great for the majority when there's high unemployment - that floor is then only marginally above survival-level, since there is no competition for that worker's labour. Minimum wage at least has the benefit of creating a fake competition effect - you would raise the wage to the min-wage on your own if other employers were employing workers and offering it (as per Smyth). Any kind of subsidy to low-paid workers has to lead to lower wages. Why wouldn't it? Isn't that how capitalists are meant to behave?

'Worth' implies a very different value system that requires a degree of altruism and fairness.

LVT and CI for me - sod all this messing about.

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It is the only way he can justify his own self-worth to himself as an ex-banker. i.e. "I got paid that because that is the value I added". To accept otherwise is to self-shred his own sense of self-worth. He doesn't have the strength to do that, but then admittedly, very few of us do. Usually we only accept such things because we are so smack-bang confronted with them, that that conclusion is inescapable, and we have no other choice but to accept them.

Banks arent charities, they dont pay their workers a penny more than they absolutely have to (just like any other business). If a bank didnt believe that the value a junior or midlevel banker adds to the bank is £100k (or whatever), then they arent going to pay them that much. Do you think that executives in banks are just very charitable people happy to pay their juniors more than they are worth to the bank?

"Productivity" here is about value added to the company employing you. Noone is claiming that a mid-level banker has more social value than a Nobel prize winning scientist just because they are being paid more.

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"Productivity" here is about value added to the company employing you. Noone is claiming that a mid-level banker has more social value than a Nobel prize winning scientist just because they are being paid more.

That Noone character again...

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Quite, and much better put than my rather incoherent ramble further back. To put it another way, companies pay what they can get away with.

Fine for a banker regarded as talented or for when they want Samuel L. Jackson to do a voice over - these are people who, for one reason or another, are valued. It's not so great for the majority when there's high unemployment - that floor is then only marginally above survival-level, since there is no competition for that worker's labour. Minimum wage at least has the benefit of creating a fake competition effect - you would raise the wage to the min-wage on your own if other employers were employing workers and offering it (as per Smyth). Any kind of subsidy to low-paid workers has to lead to lower wages. Why wouldn't it? Isn't that how capitalists are meant to behave?

The problem is that when the minimum wage is set substantially above the value that workers add to the company, it can cause the job to be removed ,increasing unemployment. If you force companies to pay people £20/hour when their work is not worth that much, they arent going to hire these people anymore. Its similar at the £5-6/hour level - some companies (like restaurants) do need workers so they are forced to pay minimum wage even when its set above the market rate, but other companies can respond by just outsourcing the jobs to a country where labour is cheaper (call centres in India etc), or by replacing workers with technology which works out cheaper (self-service checkouts in Tesco) or just by reducing the non-salary benefits to workers (holidays, flexibility, pension, etc). See http://www.nber.org/papers/w12663 for a summary of the literature showing the effects of the minimum wage on employment.

(typically though as long as the minimum wage is set to a sensibly low level there wont be a large effect on employment, but setting it to a level substantially above the market rate can actually hurt low waged workers and young people because it means that noone will hire them. Telling companies that they need to pay people £20/hour just means they will stop hiring anyone whos work is worth less than £20/hour, which includes the vast majority of people of people currently in low wage jobs).

Edited by Smyth
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I do too, and when I've voted I've only ever voted Tory. I guess I've been 'turned'

Sadly Tories only believe in capitalism and free markets when it enriches them. When it doesn't they are more than happy to intervene like any Statist dictator, hence bank bail outs and help to buy.

Also the Tories could reform tax/benefits and reform land ownership to make work pay but they don't of course, as they need an 'underclass' of single mums etc to ridicule and blame for their total economic and moral failure.

Their only hope for the next election is to conduct an insane and divisive class war. I suspect we will see a lot more 'Smyth' like comments on forums like this, to change opinions, especially as no one trusts the MSN anymore.

The die hard fanatics blind themselves to reality so for them there is no difference. But I do think a lot of the swing voting moderates have been "turned" in this way. In essence they "thought" capitalism as we have it, was designed for their betterment and the others who compose the broad mass of society. But 2008 lifted the curtain and showed the wizard behind it to be some fat banker/plutocrat on his/her personal yacht, laughing at everyone else while making out like a bandit. That sort of thing does tend to break established beliefs......it certainly did mine.

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