Short version: Scale the MERA down based on the earnings of Manx workers to encourage people to get back to work if they feel safe to do so. Currently, the effective marginal tax rate makes part-time and low-paid work very financially unattractive.
Long version: Read on…
The Isle of Man Government is proposing “to extend the Manx Earnings Replacement Allowance (MERA) and Salary Support Scheme by a further three months.” The MERA was originally instituted in a hurry, and there are now ways to improve it. Improving the MERA will help provide support to Manx people who are not able (or willing) to work, yet also encourage Manx people to make a smooth transition to work that balances their own personal risk profile.
Currently, the MERA provides “an income of £200 a week to people who have either been laid off or made redundant from their employment, or have lost their self-employed work, since 2 March 2020.” However, a claimant “won’t be paid MERA for any week in which [they] have earnings of more than £50.”
This causes a problem with MERA because of the effective marginal tax rate that Manx people face and can be easily illustrated: An individual who does not work, will get the MERA, and receive the full £200, for a take home pay of £200. An individual who works at the Manx Living Wage of £9.76 for eight hours during a week, however, will earn £78.08 (before tax deductions, etc.). This means that they will lose the MERA, and have take home pay of approximately £70 (depending on exact deductions etc.). Effectively, then, a Manx worker is roughly £130 worse off if they go to work for a day at the living wage – an effective marginal tax rate of almost 300% (any effective marginal tax rate of over 100% means that an individual is better off financially to reduce their work hours).
This is a bad effect – it discourages people from going to work, and accidentally encourages people to stay on welfare benefits for longer than they otherwise might do. In effect, it costs a Manx worker £130 to go to work. This is not helpful! This punishes someone who wants to work. This punishes the company who wants to hire a part-time worker. This punishes the taxpayer who has to pay the full MERA to more people.
There is a way to fix this problem: to gradually reduce the MERA as a worker increases their income. Rather than eliminating the MERA entirely for a recipient who earns £50, you could, for example, reduce the MERA by 20p for each £1 of income they earn. This means that the example MERA recipient above would be paid £78.08 from their employer, and then receive MERA of £184.38 (200 – 78.08 * 0.2) for total income of £262.46. They would then need to pay tax on the £78.08, but would still be better off financially working than not working.
This rewards Manx people who want to work. This rewards the company who wants to hire a part-time worker. This rewards the taxpayer who does not have to pay the full MERA to as many people.
One additional benefit of this change is that in the current pandemic, many people are nervous of being in public for fear of getting the virus. This change would make it better financially for MERA recipients to take part-time work, and in doing so, manage the level of risk that they are comfortable with. In addition, allowing people to retain some of their earned income would incentivise workers to work – helping to restart the economy, and reducing the burden on the Manx taxpayer beyond the initial MERA savings. These are benefits all-round!