Corporate tax cuts should be dependent on businesses doing the right thing

The UK has a wage progression problem – nearly 5 million employees are on low pay and 8 million working age adults and their children who live below the poverty line are in a household where somebody works.

Successive governments have increased the wage floor but a lack of wage and career progression amongst the low-paid (defined as two thirds of median pay) means many are becoming trapped on low pay. Research by the Resolution Foundation found that just one in six workers who were on low pay in 2006 had managed to consistently escape low pay by 2016.[1]

More must be done to help low-paid workers achieve wage and career progression.

Both potential future leaders of the Conservative Party have promised a variety of tax cuts – but will these benefits be passed on to the lowest paid in society?

Boris Johnson has promised to raise the 40p threshold of income tax from £50,000 to £80,000 and has stated that “we should be cutting businesses taxes”. Jeremy Hunt has pledged to drastically reduce corporation tax to “Irish levels” (12.5%) – we at the SMF believe tax deductions for businesses should be conditional on the behaviour of the firm, as is the case in Japan.

In April 2018, the Japanese Government introduced corporation tax reductions for firms who increase wages and invest in capital. Companies who raise wages by 3% benefit from paying only 20% in corporation tax rather than 30%; these companies also need to boost investment in factories and equipment. Companies in Japan have large cash reserves, as in the UK, and the aim is that this policy will encourage firms to use these reserves on wages and investment. It is too early to see the full effect of this policy change; however, workers’ real wages rose by 2.8% in June 2018 from a year earlier, accelerating from a 1.3% increase in May and marking the fastest pace of growth since January 1997.

We propose that the Government pilot a tax incentive policy for firms to promote wage increases for low-paid workers.

Businesses pay a range of taxes and no single tax deduction will capture all low-paid employees. Business rates reductions could prove a more effective incentive in companies where very little to no profit is made. In areas with very low rental values and few businesses paying business rates, such as Blackpool or Southend, corporation tax could be more appropriate. Allowing the employer to choose their tax deduction adds complexity but enables the policy to capture a larger number of low paid workers.

If the next prime minister is going to reduce taxes on business isn’t it only fair that those on the lowest pay benefit too?

We propose tax incentives for training low-paid workers

There is a considerable difference between the amount of training taking place between the income groups, across all forms of learning – with those in lower income groups the least likely to participate. The same is also true for company size, with those working for SMEs less likely to have received training in the last year than those at larger firms.

Given the lack of access to training for lower paid workers, the Government should consider offering employers additional tax reliefs when they train low-paid employees.

Further testing with employers would be required to understand the most effective form of the tax incentive. This could be taken forward as a policy on its own or as an additional conditional requirement for firms to be eligible for tax relief on top of wage increases for low-paid workers.

We propose tax incentives for employers in high paid sectors to locate in areas dominated by low-paying jobs.

Being able to move into a better, higher paying job is only possible if these opportunities are available. Our analysis shows that many areas and regions with a high quantity of low-paid staff have limited diversity of employment opportunities. For example, areas with a high concentration of retail & wholesale and accommodation & food services businesses often have a high proportion of low-paid workers. This includes coastal communities and areas in the North of England and the Midlands.

Targeting these localities with place-specific growth policies that incentivise higher paying employers to locate in these regions could result in better-paid job opportunities for low-paid workers in these areas.

A new regional tax incentive programme could be designed to build upon previous uses of employment and economic growth incentives. Through the establishment of Economic Growth Areas (EGA), businesses would be encouraged to relocate or start their business in areas where low pay is pervasive. It would be possible to require firms to train and hire local workers to benefit from tax incentives.

Tax incentives can and should be used as a tool for improving wage and career progression of the lowest paid in society. It is time politicians started to realise the scale of the low pay trap and look at how they can use tax to make a real difference to those on low pay.

This blog is based on the recent SMF publication “Pay progression for low-paid workers”. See the full report for more information on the causes of low pay and the policy recommendations put forward to address pay and career progression.

[1] Resolution Foundation, “The Great Escape? Low pay and progression in the UK’s labour market”(2017)


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