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Michael Devereux

Location:

Oxford University Centre for Business Taxation

Area:

Taxation

Expertise:

Corporate Taxation

By Michael Devereux

The Job Support Scheme is a huge tax on employment

The Job Support Scheme (JSS) announced on Thursday last week has been billed by the government as subsidising the pay of employees who are working fewer than their normal hours. It is supposed to support employment and prevent layoffs. It has received broad support from business. According to Dame Carolyn Fairbairn, the CBI’s Director-General, “it won’t help every firm, and it won’t save every job, but it will protect jobs.”[1]

Unfortunately, this is simply not true. The incentives created by the scheme are unlikely to support jobs. It is not a subsidy to employment – it is, in effect, a huge new tax on employers. If anything, it is likely to create more, not less, unemployment.

As my colleagues and I argued in a recent paper, there is a good case for supporting jobs in an effort to create a more rapid recovery from the crisis. Businesses that face low demand – for example, in hospitality, due to social distancing – may not have enough work to justify rehiring employees full-time. An extension of the Coronavirus Job Retention Scheme to protect incomes of workers returning for less than their normal hours would therefore be beneficial. Beyond that, a true job support scheme would also lower the costs to employers from rehiring their employees.

The JSS does achieve the first of these: the government will pay one third of the wages foregone of workers working less than their normal hours. That is welcome. But the vitally important catch is that employers are also required to provide the same level of support. That turns the JSS from being a subsidy to rehiring workers to being a massive tax on rehiring workers.

In brief, the scheme applies to employees who work less than their normal hours, as long as they work at least a third of those normal hours. If an employer chooses to participate in the scheme, then the business is required to pay for the time the employee works and is also required to make an additional contribution to the loss of pay of the employee for time not working.

To take an example, suppose an employee normally works 36 hours a week and earns £15 per hour.  Normally, gross pay is therefore £540 per week. Now suppose that the employee works for one third of the normal hours: 12. Gross pay would be £180. But the employer must also pay one third of the foregone income, an additional £120. That is a new tax on the employer of 66.7% of the wages actually earned.

Think of a pub that must socially distance and close at 10pm. It may well not have enough business for its workers to work full time. To prevent layoffs, there is a strong case for subsidising employment, so that the cost to employing a worker for say one third of the normal hours is actually less than one third of the normal wage. That would encourage employers to keep their employees on the books, and to keep the pub open.

But the JSS does precisely the opposite. Suppose the employer can just afford to re-hire an employee at 33% of normal hours – with the employee contributing just enough in revenue to justify their normal wage. That employer will actually have to pay 55% of the normal gross wage. That could only be accomplished if that employee’s productivity went up by two thirds.

The rate of tax diminishes the more hours the employee works. If she works half time, for example, then the rate of tax falls to 33.3%. It disappears entirely only when the employee returns at their normal hours. That creates an incentive for employers to rehire some workers at normal hours and make others redundant. For example, the cost of re-hiring three workers at one third time each will be 67% more than making two of them redundant and re-hiring the third on normal hours.

The need now – at least in the absence of another more severe lockdown – is to get the economy moving. That means getting furloughed employees back to work. Cash-strapped businesses may hesitate to re-hire workers given the inevitable uncertainty about demand. So an obvious approach for the government is to encourage them to do so, by reducing the cost of rehiring employees. This could be done, for example, through a holiday on employers’ national insurance contributions.

The Job Retention Bonus is very much along these lines, offering a one-off payment to employers of £1,000 for every employee who they previously claimed for under the scheme, and who remains continuously employed through to 31 January 2021, and who earns on average between November and January. That will help protect jobs until the end of January, but – as pointed out by Irem Güçeri, in an earlier blog – only for lower-paid employees.

The initial Coronavirus Job Retention Scheme was a bold move by the government to maintain employment contracts, to support workers and offer employers flexibility. It was introduced at a time when significant parts of the economy were simply closed down. It has proved to be immensely successful. The JSS extends this to employees working less than normal hours.  While that is welcome, it is unlikely to help employment, because part of the cost of that support is being passed onto employers.

Instead of subsidising part-time employment, the government is in effect inviting employers to pay a huge – though still voluntary – tax. True, the proceeds will be passed on to employees. But it is the worst possible policy for encouraging employers to re-hire workers. Some employers may choose to make this payment, possibly out of a sense of loyalty to employees. But many will not. This policy will not stem a massive and sudden rise in layoffs and unemployment – if anything, it will contribute to it.

 

Recent relevant research from the Centre for Business Taxation:

Discretionary Fiscal Responses to the Covid-19 Pandemic, Michael P. Devereux, İrem Güçeri, Martin Simmler and Eddy Tam, Oxford Review of Economic Policy, June 2020.

Tax Policy and the COVID-19 Crisis, Richard Collier, Alice Pirlot, John Vella, Intertax, forthcoming.

COVID-19 Challenges for the Arm’s-Length Principle, Matt Andrew and Richard Collier, Tax Notes, Volume 98, Number 12, June 22, 2020.

[1] https://www.cbi.org.uk/articles/cbi-10am-analysing-the-chancellor-s-economic-plan-and-where-next-for-business/.

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