Employers’ Burden 2022

Our tax system is so misguided that it doubles the cost of employment and government spending, as the bar chart shows. The topmost bar is for those with a nominal salary of £10,000 per year; the division is into percentages. For each line of gross salary the length of the line is the total cost to the employer, including employers’ National Insurance contributions. The blue portion of each line is the amount received by the employee, minus indirect taxes, such as VAT; it represents real wages. The effects are capricious and reflect the workings of the personal allowance and higher rate thresholds. The personal tax free earnings allowance is one of the better features of the UK tax system, since it makes it easier for those with few skills and experience to gain get a foothold into employment. It would be advantageous to increase the personal allowance and thresholds. Employees with salaries of £25,000 are affected hard, as again are those with salaries of £50,000 and more. Top managers and executives become a heavy cost to their employers. In the public sector, it means that a substantial part of the operating costs consist of tax; the money is just going round in a circle as the government pays money to people which they pay back in tax; in reality, of course, they do not (apart from sales taxes), as these transfers are just book entries, but it makes the apparent cost of public services larger than it really is.

The Chancellor’s decision to freeze allowances is exactly wrong, since inflation is going push employees further down in the diagram, where the employers’ tax burden is greater. It is a mystery that a Conservative Chancellor can fail to appreciate this.

Direct taxes are calculated from tax tables. Indirect taxes are taken from an ONS paper “Household Finances Survey”. Some judgement has been used to match the two sets of figures. 

Here are some suggestions as to the possible real effects of this situation

1. There is a sharp distinction of the view of wages from the points of view of employers and employees.
2. There is constant impulse to replace people by machines.
3. Unemployment is a constant factor in the economy.
4. The effect of taxation at the margin is to kill off economic activity which might otherwise have been viable, leading to increases in tax so as to mitigate those effects. This maintains a vicious cycle.
5. In the cycle of production, employment based taxation rolls up until it is paid by the final consumer. The consumers’ gross pay has to be has to be sufficient to pay the taxes and leave enough to live on.
6. Government expenditure is mostly wages, and is thus doubled under the same rules.
7. In order to cover the cost, an employee has to be able to add value to an amount twice what is needed to live on.
8. Those who cannot meet this criteria will likely find their jobs at risk, if, indeed they can find any employment at all.

Although the UK is by no means the worst example (Sweden is probably at the bottom of the league) the disadvantages suffered in comparison to countries that do not tax wages so highly must be huge. It is, in fact, a 100% tax on wages!

This information was prepared by Tommas Graves.