Free market welfare: The case for a Negative Income Tax

//Free market welfare: The case for a Negative Income Tax

Free market welfare: The case for a Negative Income Tax

Executive summary

• Lower trade barriers, automation and cheaper transport have brought millions of extra low- and un-skilled workers onto the world market. While this has raised living standards and productivity
overall, it has also created a group of people whose relative position has weakened considerably: lower skilled workers in developed countries. Globalisation has lowered the market value of many workers’ skills to the point that the clearing price for some labour cannot provide a growing proportion of the UK
population with an income that meets the popular definition of minimum living standards—even though it has also contributed to cheaper consumption bundles.
• This has been partially masked by government welfare policies but the current stopgap solutions to this are costly, ineffective and overly complex leaving many people stuck in poverty traps and financial insecurity. Recent proposed changes to the tax credit and minimum wage systems will only exacerbate the problems facing low-productivity workers.
• This paper will make the case that if any type of poverty spending is necessary, it should be the one which can provide the simplest, clearest system which places an emphasis on incentives, freedom
and choice: A Negative Income Tax.

1. What is happening in the UK labour market?

The changes to the UK Labour market in the last 30 years should be examined in the context of changes to the global labour market caused by three major trends:
• Globalisation of and liberalisation of labour markets
• Technological and logistical improvements
• Automation
All three factors have contributed to a pronounced trend in the global income distribution: the merging of what was formerly many local labour markets bounded by borders, regulations and geography into
one global labour market.

For UK workers in possession of highly valued skills or innovators seeking investment this broadening of markets has brought large increases in income and investment opportunities; for lower skilled
workers in developing countries the opportunity to sell their labour to  the world has brought huge welfare gains and massively reduced the incidence of absolute poverty.

However for lower skilled workers formerly occupying protected labour markets in developed countries, this opening up of markets has brought considerable challenges. Despite gains in overall productivity
and increases in consumption (particularly the affordability of consumer electronics- workers are after all also consumers), the relative welfare of these workers is jeopardised by their increasingly precarious economic bargaining position. Workers must now compete with outsourcing made simpler by technology, logistics, lowered trade barriers and even just labour force size, as the number of workers
able to acquire skills and sell to the global marketplace has risen.

Competition overseas has been matched by competition at home- the reduced regulatory burden and cost of transportation and communication which makes outsourcing possible also makes the importation
of foreign workers easier; there is also competition from non-human labour in the form of automated work processes which grow ever more sophisticated and cheaper to utilise.

This is most visible among younger workers—youth labour markets have been undergoing structural change for some time; even prerecession demand for inexperienced youth labour has been falling.
This trend has only been exacerbated by recent economic events to the point that the UK’s youth labour market has been described as ‘vanishing’ in government reports (Wolf ) Even the de facto abolition
of the minimum wage for apprenticeships has not totally reversed this situation.

Among adults, the most striking trend in UK and other rich-country poverty is in-work poverty among working adults; that is, a rising number of people, however willing they are to work hard, are unable
to sell their labour for enough income to sustain what a majority of the population agrees is a reasonable minimum standard.

While it’s true that many government interventions lower employee pay packets (whether directly, like income tax or employee national insurance contributions, or indirectly, like corporation tax or
employer national insurance contributions), other policies push in the other direction (e.g. working tax credits, minimum wages, in-work cash benefits). This means that the proportion of the population who
would fail to meet this minimum reasonable standard in a ‘natural’ free market. is higher than many imagine.

In summary, the UK labour market is shifting in the direction of rising income inequality.

Without government intervention or reform of our existing interventions the UK faces considerable challenges from this development.

What will happen to those who are not only missing out, but seeing their income decline from these changes?

By | 2017-07-22T19:04:23+00:00 July 22nd, 2017|Europe|0 Comments

About the Author:

Retired colonel at Turkish Army. Chief of Staff, 3th Infantry Division at Turkish Army. Assistant Brigade Commander, Mountain and Commando Brigade at Turkish Army. Regiment Commander, 7th Border Regiment at Turkish Army. Plans Officer, HQ JCSE, Land Component Command at NATO, Izmir, Turkey. Exercise Branch Chief, HQ JCC (Heidelberg, Germany), Land Component Command at NATO. Education: Turkish Army War College, Turkish Army Command and General Staff College, Turkish Military Academy.

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