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CLASS Ideas: The Need for an Excessive Pay Levy

Over the next few weeks in run up to the General Election, CLASS will be putting forward the alternative policies we need to address the challenges the UK faces.

With the election now in full swing, CLASS has been thinking about alternative policies to the problems this country faces. With the average FSTE 100 CEO now earning £5.5m per year (up 10% from the year before) and the ratio between average CEO pay and that of the average UK worker standing at 183:1, what's clear is that wealth and income inequality is only getting worse, and we need policies to address it. This is one area where there is cross party agreement, so here's a bold policy proposal that kills a few birds with one stone.

We recommend an "excessive pay tax" - a payroll tax levied on the employers for paying excessive salaries to de-incentivise the payment of these salaries, and to provide an extra source of revenue for public services. 

This policy would only affect the top 0.34% - those earning over £300k. It will tackle the irrational, unearned, and unhealthy levels of pay at the top, and the pay gap between the Mike Ashley's of this world and their workers. 

How would it work? 

We propose that employers pay a levy on every employee paid over £300k. The tax would be levied on the self-employed directly, ensuring that the likes of high earning consultants pay their fair share.  And of course, bonuses, share options, and dividend payments could also be included. In the table below we've calculated three ways this levy could be applied - firstly, a simple 2.5% levy across all earnings over £300k, secondly, a progressive graduated levy, and finally a windfall excessive pay levy.

What could the new revenue pay for? 

According to CLASS calculations, a graduated excessive pay levy could bring in £1.7bn. This would help bridge the funding gap for the health service, the social care sector, or education.

The £1.7bn annual intake would significantly dent the social care funding gap (£2.6bn) and would comfortably meet the Labour-proposed NHS pay rise (£350m per each extra 1%). It would easily fund the NHS nursing bursaries the government is cutting (£800m). It could help restore student maintenance grants (£3bn), and, also on education, it could meet a significant chunk of the £3bn funding cut our schools will face by 2020

While a higher windfall rate of £2.8bn could go even further, even a simple excessive pay levy would bring in £0.8bn, and would help considerably in meeting some of these shortfalls.

The money raised could even be earmarked for skills, training, and infrastructure to help raise productivity, and therefore wages in the long run. 

There would also be a multiplier effect here, as extra money spent doesn't just disappear. The money raised is pumped back into our economy through consumer spending, or it creates employment through building projects, or reduces the financial burden of social care on families. According to a UNISON study based on IMF figures, every 1% increase in public sector pay would generate between £710m and £820m for the government in increased income tax, National Insurance contributions and expenditure tax receipts, and reduced benefit and tax credit expenditure. It would also inject between £470m and £880m of extra value into the economy.

If we are going to get real wages to rise, if we are going to narrow the gap between the rich, and improve our public services then we need bold action. An excessive pay levy would be a step forward in making the UK a fairer country, as well as bringing in the crucial money necessary to help fund vital public services.

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