How about lower corporation tax and the living wage?

I have written before about how the so-called “Living Wage” is total economic illiteracy, and no one attempted to demonstrate to me otherwise. That is not to say (and I was clear about this) that higher wages are a bad thing; it is that paying people a value beyond their contribution will simply have an inflationary effect, rendering the whole thing practically pointless – there is no point earning 15% more if your cost of living also goes up 15%!

However, I have also argued in the past that one of the main economic reasons the campaign for a Corporation Tax reduction in Northern Ireland has got precisely nowhere is that businesses have refused to be specific about how they would spend the extra money. This has led Unions to mount a successful campaign against the move, on the grounds that money would not be paid into public funds for public services, but rather into shareholders’ pockets as dividends. There is an element of truth to this – with the additional problem that those shareholders would by no means necessarily be resident in Northern Ireland. The phrase “taking money out of the economy” is outrageously overused, but in this case it may literally happen.

I have argued instead that were business in Northern Ireland to be clear that they would use the money to increase wages, thus closing the public/private pay gap, that would make the case for the Corporation Tax reduction much more compelling. Increased wages would have direct benefits, in that people would have more money to pay off debts or to spend; and it would also have the indirect benefit of enabling businesses to offer competitive wages to ensure not all our best people choose the public sector (or to leave Northern Ireland altogether). Indeed, a higher wage base would enable businesses here to recruit good people from outside Northern Ireland, enhancing our overall skills base.

This leads me to an obvious option which should perhaps be researched by all the parties here: how about offering lower corporation tax to businesses prepared to pay the Living Wage as a minimum?

As I explained in a previous article, offering the Living Wage would lead to wage inflation throughout any organisation choosing to do so. However, instead of the costs being past on to the hard-pressed customer, they would now be absorbed by a reduction in Corporation Tax for that organisation. It is quite possible that a number of businesses would still end up better off overall from choosing this option. They would also then, as higher-wage businesses, be in the position in the medium term to recruit more competitively, thus providing a longer-term indirect advantage as well as the immediate direct one.

I haven’t done the detailed calculations – I am, after all, a volunteer blogger! – but I would like to see some expert analysis of this proposal. This could remove the inflationary impact of introducing the Living Wage while at the same time closing the private/public pay gap – all while attracting investment. It may be worth a try?


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