10 January 2017

Corbyn’s maximum wage cap would only hurt the poor

By Stephanie Lis

Free marketeers aren’t famous for seeing eye-to-eye with Jeremy Corbyn’s economic policies, but his announcement today backing a maximum wage cap is high up on the list of his most incoherent interventions to date. Aside from being beset with practical problems, it demonstrates a deep misunderstanding of how wage-setting works.

There is no reason – morally or practically – why any person should not enjoy a certain amount of wealth. Wealth is not a fixed sum. High earners do not deprive others of wealth. In fact, not only does wealth create more wealth by but it also enriches those around them.

Critics love to decry this as “trickle-down economics”, but it’s a straightforward fact that wealth is used to purchase goods and services, creating more and better-paid jobs. We want more millionaires and billionaires who can contribute to our economy in this way, not fewer.

Imposing a cap would almost certainly act as an incentive for the richest to leave to the UK, depriving the Government of sizeable tax contributions altogether – not exactly good news for the coffers of our public services, which the Labour leader already believes require a constant flow of extra cash.

Perhaps this goes some way towards explaining the Labour Party’s recent volte-face on support for freedom of movement – penalise wealth creation and prevent those wealth creators leaving!

The cap would also be damaging to British businesses, who would be at a comparative disadvantage to other countries in being able to hire the best people in the world.

Most significantly, however, a maximum wage cap would do nothing to help the poorest – the group which the Labour leader purports to want to help the most. Penalising wealth creation will not help those struggling to make ends meet.

If he really wants to get serious on poverty alleviation, Jeremy Corbyn should take a look at cutting living costs through policies such as planning liberalisation and energy market deregulation.

Practically too, the Labour leader has several questions to answer. Would the cap apply every year, or over a lifetime? Could footballers, for example, continue to earn huge sums in their twenties to compensate for much lower incomes in later life? And would his cap apply to capital gains?

He made clear that the wage cap wouldn’t affect him personally, even though he earns about six times the average income. If we’re in the game of arbitrary wage-setting, perhaps he should answer why he ‘needs’ this much.

Corbyn must stop digging up old ideas that have long since had their day. For all intents and purposes this is a 100 per cent income tax rate. It would do nothing to tackle inequality and simply serve as a disincentive for investment, enterprise and growth in the UK.

Stephanie Lis is Director of Communications at the Institute of Economic Affairs