Tax Structure vs. Minimum Wage

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My Facebook has been flooded lately with pleas to raise the minimum wage, usually delivered in the typical content-free info-graphic format. This is a question I've settled already with more than one friend with actual credentials in economics, so it's kind of an exhausting argument to be having again.

The opinion seems to be:

  • Wages are too low
  • Employers have a responsibility to pay a living wage.
  • We should codify such in law.

Where the second item comes from I have no idea; as far as I knew employer responsibility ended at "honor the fucking employment contract," but this is what's presented.

My counterargument has been as follows:

  • Minimum wages act as a tariff on labor and reduce the performance of the labor market.
  • Society is the one complaining about a living wage, so they're the better candidate to pay for it anyway.
  • Therefore increasing the EITC, or instituting a negative income tax, and allowing the "under-payed" to take advantage of such a social safety net, correctly separates the problem and doesn't deprive us of as many of the market's production benefits.

The central complaint I've dealt with has been with the second point again. The best argument I've heard is that the market is distorted in favor of employers because the politics that define it are distorted by money in politics. This starts off okay, but then it continues into the assertion that "unchecked capitalism" (whatever that means) is necessarily going to produce such a situation, so my offered solution of "fix it" isn't a valid avenue.

Let's leave both of those aside, though, and come at this another way. The minimum wage and social benefits seem at first to be very different. I believe that any two arguments can be better compared if you can state them in the most similar possible terms. In this case we'd want to make the EITC or negative income tax look like a wage restriction, or we'd want to make the minimum wage look like a tax system or credit. I believe I can make the minimum wage look like a system of tax deductions and credits. I believe I can do so to the satisfaction of minimum wage proponents, such that they would feel comfortable framing the debate around this construction of the minimum wage, and I believe that comparing that tax system to a negative income tax and other tax policy makes the debate clearer and more concise.

Let's begin assuming the negative income tax, and look at one crucial moment in either of these systems: the arrival of the low-wage employee's paycheck. Customarily, employers withhold income tax from employees and relay it to the government directly, with corrections made at the year-end W2. It follows, then, that if income tax went negative, employers would cut a larger check and seek reimbursement.

So far, so good. This transaction looks identical to the minimum wage: employers cut larger checks and employees take home more money, so from an employee perspective the two are identical. Either way it's a bigger paycheck. Of course for this to be structurally identical to the minimum wage, said negative income tax would have to be structured to flatten wages below a certain line. You might not want to do that, for a few reasons, but I'll concede it for now.

But we've involved another transaction where the negative income tax is still different: the employer usually takes withheld income tax and relays it to the government. In the case of negative income tax it would seek reimbursement, or take a credit toward how much of those withholding it had to submit. The correction is obvious: we impose an additional tax on corporations, proportional to the number of low-wage employees it has, scaled by how low their wages are, such as to negate said reimbursement. Now we've imposed the minimum wage, with the same flow of cache and a surprisingly similar amount of bureaucratic overhead, by simple manipulation of tax law.

So now we can re-frame the minimum wage position more simply:

  • The negative income tax is only rendered fair by a complementary tax on employers in exact proportion to the amount of benefits their employees receive.

That's a much smaller set of points. This argument now feels clearer. I'm inferring that I haven't stepped on any minimum-wage-proponents' toes, but if everyone's on-board, this debate is simpler.

And the question that remains is how married are you to that only and exact? I never said we couldn't raise corporate taxes per se to fund the new negative end of the tax curve, so the question becomes why is this exact tax structure the only fair way to do it? A general corporate profit tax would give a break to small business owners who aren't necessarily making much more than their low wage employees and still hit the "big evil corporations" you're blaming for the whole mess. You could actually fund part of it with a high-bracket income tax hike and get a similar effect yet again. I'm sure you could hit them hard enough to be satisfied (and I won't even suggest a limit for corporate profit or high income tax here at all!) without connecting it to any sort of job-creating activity, which should keep the market healthy.


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