Tax cuts needed to cut chronic youth unemployment

January 20, 2011 12:38 PM

Youth unemployment has risen to the highest level on record raising concerns about the effect of Britain’s tax system and employment laws on enterprise and employment opportunities. Figures released by the Office of National Statistics have shown unemployment among 16-24 year olds to have risen by 32,000 in the three months to November 2010, bringing the youth total to 951,000. The figure equates to a youth unemployment rate of nearly 20 per cent. Overall unemployment rose by 49,000 to 2.5m, or 7.9 per cent of the workforce. TUC general secretary Brendan Barber highlighted the damage:
“With more than a fifth of young people out of work, we face a real danger of losing another generation of young people to unemployment and wasted ambition.”

Meanwhile, Christine Braddock, president of the Birmingham Chamber of Commerce stressed the need for action to tackle the problem and prevent more ‘wasted ambition’ in the West Midlands, the region which saw the largest rise in unemployment to 9.9 per cent:
“These latest shocking figures are even more reason for  the government to provide businesses with the freedom to create jobs and wealth.”

[caption id="" align="alignright" width="261" caption="Employment alternatives"][/caption]

High minimum wages may simply put businesses off hiring some hard-to-employ young people (an unemployed 20 year old does not become more attractive to potential employers simply because he reaches his 21st birthday and must be paid £5.93 an hour instead of £4.92) and our restrictive planning regime may hold up a workplace from being able to expand but most prominent among the restrictions has to be tax and the ‘tax wedge’ it creates between jobseekers and employers.

Many different taxes act as disincentives for the economic activity which prompts businesses to create jobs.

1. VAT shrinks the amount a company captures from the value it creates for its customers. A business which might survive without VAT may find it cannot if its customers have to pay an additional 20 pence to the Treasury for every pound they give to the business. VAT particularly hits the retail and catering sector, where young people are disproportionately employed.

2. Corporation Tax reduces the financial benefit companies earn from the investments they make. When executives calculate the probable returns for their shareholders when they are deciding whether or not a project is viable, Corporation Tax is a major cost. Some projects will be worthwhile anyway, but some will no longer be worthwhile to the company because of the tax and won’t go ahead, meaning fewer jobs.

3. Employers’ National Insurance (NI). Aka the ‘tax on jobs’. When a business is deciding whether or not to create a job, an important additional cost is the employer’s NI. Employees don’t always notice this tax as it’s not detailed on payslips. But employers have to work out whether an employee is worth not just the salary and costs they see on the payslip, but also those like this that they don’t. To be employable, a jobseeker must be worth the combined sum of both his salary and his ‘job tax’.

4. Income Tax reduces the value of a job to an employee relative to unemployment. Without income tax (and employee’s NI, which is effectively an additional income tax) a job would offer the full financial appeal on offer from the employer but this is significantly lessened thanks to income taxes. An employee on minimum wage only needs to work 19 hours a week before he starts to pay employee’s NI and if he works 23 hours a week he’ll also be paying Income Tax. At the relatively low level of pay of minimum wage, small changes make a big difference to the calculation of whether or not all the hassle, effort and stress of finding a job and then keeping it is worth giving up the various benefits and more free time available to the unemployed.

5. Duties, business rates, Inheritance Tax and other taxes all have a negative effect on employment. Any tax will create a disincentive to the activity being taxed and that ultimately translates into fewer jobs. Business rates, for example, provides an additional cost to moving to bigger premises while inheritance tax may reduce the effect that inheritance has been shown to have in increasing self-employment rates.

Policy makers will need to reduce these taxes if they are to make real progress in opening up employment opportunities and reducing the unhappy spectre of 20 per cent youth unemployment.Youth unemployment has risen to the highest level on record raising concerns about the effect of Britain’s tax system and employment laws on enterprise and employment opportunities. Figures released by the Office of National Statistics have shown unemployment among 16-24 year olds to have risen by 32,000 in the three months to November 2010, bringing the youth total to 951,000. The figure equates to a youth unemployment rate of nearly 20 per cent. Overall unemployment rose by 49,000 to 2.5m, or 7.9 per cent of the workforce. TUC general secretary Brendan Barber highlighted the damage:
“With more than a fifth of young people out of work, we face a real danger of losing another generation of young people to unemployment and wasted ambition.”

Meanwhile, Christine Braddock, president of the Birmingham Chamber of Commerce stressed the need for action to tackle the problem and prevent more ‘wasted ambition’ in the West Midlands, the region which saw the largest rise in unemployment to 9.9 per cent:
“These latest shocking figures are even more reason for  the government to provide businesses with the freedom to create jobs and wealth.”

[caption id="" align="alignright" width="261" caption="Employment alternatives"][/caption]

High minimum wages may simply put businesses off hiring some hard-to-employ young people (an unemployed 20 year old does not become more attractive to potential employers simply because he reaches his 21st birthday and must be paid £5.93 an hour instead of £4.92) and our restrictive planning regime may hold up a workplace from being able to expand but most prominent among the restrictions has to be tax and the ‘tax wedge’ it creates between jobseekers and employers.

Many different taxes act as disincentives for the economic activity which prompts businesses to create jobs.

1. VAT shrinks the amount a company captures from the value it creates for its customers. A business which might survive without VAT may find it cannot if its customers have to pay an additional 20 pence to the Treasury for every pound they give to the business. VAT particularly hits the retail and catering sector, where young people are disproportionately employed.

2. Corporation Tax reduces the financial benefit companies earn from the investments they make. When executives calculate the probable returns for their shareholders when they are deciding whether or not a project is viable, Corporation Tax is a major cost. Some projects will be worthwhile anyway, but some will no longer be worthwhile to the company because of the tax and won’t go ahead, meaning fewer jobs.

3. Employers’ National Insurance (NI). Aka the ‘tax on jobs’. When a business is deciding whether or not to create a job, an important additional cost is the employer’s NI. Employees don’t always notice this tax as it’s not detailed on payslips. But employers have to work out whether an employee is worth not just the salary and costs they see on the payslip, but also those like this that they don’t. To be employable, a jobseeker must be worth the combined sum of both his salary and his ‘job tax’.

4. Income Tax reduces the value of a job to an employee relative to unemployment. Without income tax (and employee’s NI, which is effectively an additional income tax) a job would offer the full financial appeal on offer from the employer but this is significantly lessened thanks to income taxes. An employee on minimum wage only needs to work 19 hours a week before he starts to pay employee’s NI and if he works 23 hours a week he’ll also be paying Income Tax. At the relatively low level of pay of minimum wage, small changes make a big difference to the calculation of whether or not all the hassle, effort and stress of finding a job and then keeping it is worth giving up the various benefits and more free time available to the unemployed.

5. Duties, business rates, Inheritance Tax and other taxes all have a negative effect on employment. Any tax will create a disincentive to the activity being taxed and that ultimately translates into fewer jobs. Business rates, for example, provides an additional cost to moving to bigger premises while inheritance tax may reduce the effect that inheritance has been shown to have in increasing self-employment rates.

Policy makers will need to reduce these taxes if they are to make real progress in opening up employment opportunities and reducing the unhappy spectre of 20 per cent youth unemployment.

Latest Blogs: