Businesses that raise wages and training budgets for low-paid workers should get tax cuts, a think-tank has said.
The Social Market Foundation said that Britain should emulate Japan, which has offered corporate tax cuts to firms that increase pay for their staff.
Tax cuts should also be used to encourage more training for young and low-paid staff, who are most likely to miss out on support to boost their skills.
The SMF, a cross-party think-tank, said the recommendations should be taken up by any prime minister, whatever their party.
Several of the candidates for the Conservative leadership have said they would cut Corporation Tax.
The SMF said that tax cuts for business should be made conditional on increases in wages for staff on the lowest rates of pay, in order to counter in-work poverty.
SMF set out several options for cutting taxes to encourage and reward firms that do more to help their workers earn more and boost their future earning potential.
The SMF said the UK government should learn from a policy introduced in Japan in 2018 to encourage wage growth.
Japanese companies that raise wages by 3% or more pay corporation tax at 20% rather than 30%. Japanese wage growth accelerated in the months after the policy was put in place to its highest rate since 1997.
The report said:
“Tax incentives can encourage firms to increase wage levels for low paid workers. Whilst the tax incentive scheme in Japan is still in its early days, the initial evidence shows how firms may react to tax incentives when these incentives are designed correctly.
We propose that the Government pilot a tax incentive policy for firms to promote wage increases for low paid workers.
Another option the SMF studied is for firms that commit to paying staff at least the Living Wage (£9/hour outside London, £10.55 in London) to be given reductions in their Business Rates. Some local councils including Brent, Ealing and Greenwich are currently experimenting with such local tax incentives.
The SMF report also suggested that existing tax incentives to support training be expanded. Several existing schemes allow firms to set the cost of training against their tax bill, reducing the cost. But the SMF found that such incentives are not enough to encourage training for young and low-paid staff, who most often miss out.
Workers earning more than £45,000 are more than twice as likely as those earning less than £15,000 to have some sort of workplace training or development. The lack of training and skills development is a major obstacle to low-wage workers increasing their earnings and part of the reason many families are trapped in poverty despite being in work.
Kathryn Petrie, Chief Economist at the Social Market Foundation, said:
“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. 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.”
“Whoever they are and whatever party they come from, anyone who wants to govern Britain should help low-wage workers earn more and develop their skills. Too many people are working hard but remain stuck on low wages without opportunities to move up.
“Linking tax-cuts to wages and training would strike a new contract between business, workers and the state, where employers who support their staff are rewarded while staff earn more and develop the skills that are vital to their future earnings and Britain’s future growth.”
“Economic policy doesn’t have to be an ideological battlefield between Right-wingers wanting to shrink the state and Left-wingers wanting to do away with the market. A sensible social market approach can deliver a partnership where everyone gains, especially those on low wages.”
Campbell Robb, chief executive of the independent Joseph Rowntree Foundation, who funded the report, said:
“As a country we believe that work should offer a route to a decent standard of living, but more and more workers are finding themselves trapped in poverty. Tackling in-work poverty needs to be a priority for any incoming prime minister, and it will involve working with employers to make sure that work always pays.
“Being able to develop your skills is good for workers, good for their families and good for employers, and it needs to be the norm in every job. The tax system is just one way of bringing about better jobs and encouraging employers to play their part in ending in-work poverty.
“People on low incomes are looking to whoever is leading the country after Brexit to hear their concerns and bring forward a domestic agenda which allows them to build a better life and addresses the burning injustice of in-work poverty.”
Notes:
James Kirkup, SMF director: james@smf.co.uk and 07815 706 601
Barbara Lambert, SMF media officer: barbara@smf.co.uk and 020 7222 7060
About the SMF:
The Social Market Foundation (SMF) is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this.
The report was supported by the Joseph Rowntree Foundation, an independent social change organisation working to solve UK poverty. For more information visit www.jrf.org.uk
The SMF retains complete editorial independence of its publications.