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The Tax Wedge

Our resident accountant has just been analysing the effect of the current tax rates. Their most significant impact is of course at the margin. An unemployed single person receives about £200 a week in Jobseekers’ Allowance, housing benefit, &c. Of that, about £20 a week is paid back to the government in tax, a nice example of churning, so the real purchasing power of the £200 is £180. If the unemployed individual starts working, the gross labour cost to the employer must be not less than £315 a week if the net pay is to be more than the amount received in benefit. In other words there is an employment tax surcharge of 57% on marginal labour. This figure used to be known as the Tax Wedge, but because economics has fashions, it is not a phrase that is heard these days. In terms of real purchasing power, the employer’s burden is 71%.

Which helps to explain why some people are trapped in idleness and welfare dependency, while jobs are exported to places like China, India and Thailand – or don’t get done at all.