Saturday, November 30, 2013

The Minimum Wage Debate and Tax Incentives

Originally when I started over at Chicago Boyz I used to write regularly about tax policy. I haven't written as much lately on that topic because the news has been completely dispiriting... at every turn it seems that the Federal, State and Local governments have taken positions to make the system more complex, confusing, and dysfunctional.

The goal of a tax policy should be to:

1. Achieve the revenue goals that they set out to meet
2. Do so in a way that has causes the least amount of distortions to the economy

Recently the idea of "fixing" our tax policies and incentives, for me at least, is aligned with recent discussions on the idea of raising the minimum wage. The minimum wage is $7.25 / hour, although this varies with state and local laws as summarized here. A suburb in Seattle, near the Seattle-Tacoma airport (Sea-Tac), recently passed an ordinance to raise the minimum wage to $15 / hour. This ordinance is a bit more clever than most, since the airport is unlikely to close or take significant actions due to the immense capital costs and constraints associated with doing so, and has a strong public element (politicians can just try to pass the costs on to air travelers).

These same discussions come up in Chicago, as fast food workers also have had some (small) demonstrations to try to raise the minimum wage to $15 / hour. While their campaign has sputtered out, it will likely re-surface and be championed by our governor.

The obvious difficulty with raising the minimum wage is that employers are not sitting ducks. There are many low wage workers in River North, for instance, working in bars, restaurants, cleaning services, and in various security related occupations (virtually every building has a set of doormen). If you doubled the minimum wage, for instance, all of these businesses and institutions would immediately embark on a host of labor saving initiatives and automation efforts. I am not an expert in these sorts of automation experts but can imagine people being replaced by computers, call centers handling service, and moving to self-service for customers in other instances. It is highly unlikely that they would just attempt to pass on the price increases and keep the same level of staffing; that would be economic suicide, especially with their competitors scrambling to reduce their labor expenses. Efforts that could not be automated would rise in price, which would likewise discourage consumption, until an equilibrium was reached.

Wages cannot rise unless productivity rises as well; there are many jobs that are worth $15 / hour, and there are other jobs that cannot justify that rate. If skills can be increased or employee activities and incentives can drive in additional business, then a wage can be justified.

The fact that some economists say that raising the minimum wage doesn't impact employment is astonishing; of course a significant rise in the minimum wage would compel business owners (and non-profits who face a "hard constraint" of funds) to immediately change their processes and methods to be as profitable as possible. You cannot just "pass along" these sorts of price rises onto customers; you can only charge a premium price for a premium product (think Apple, Mercedes, and even Starbucks) and this premium will constantly attract a horde of competitors.

However, there are wider benefits to society if people are working and contributing rather than just passively sitting at home, out of work (and presumably taking part in various government programs as a result). A minimum wage job is a step up the economic ladder - the new CEO of Wal-Mart started out as a warehouse employee, for instance. We need to build INCENTIVES for people to work, and ENCOURAGE businesses to employ more workers, rather than piling on burdens, paperwork, and economic dis-incentives.

From a tax perspective, Ronald Reagan hit this on the head with the "Earned Income Tax Credit", which provides a tax incentive (payment) to workers whose earnings were below a certain level. This program, like many other programs, has been hit with fraud and certain preparers that were churning out bogus claims.

We also need to begin to consider the long-term explosive impact of youth unemployment. The countries of Western Europe are starting to see sky-high rates (up to 50%) and any student of revolutions and unrest knows that a vast pool of idle young men is a powder keg for any society. While our rates of youth unemployment are far lower than the European countries, they still are distressingly high and rising, especially in poorer neighborhoods. We should look for ways to make it easier, not harder, for businesses to employ young and entry-level workers.

Many commenters, especially on blogs like Chicago Boyz, will vociferously deny that the government should interfere at all with commerce and social goals (like general employment) should not be linked to tax policy. Yet unless the tax code is completely overhauled (a distant and receding goal, from my perspective), the EITC is one of the less onerous tools to attempt to get some useful outputs from our tax system.

Cross posted at Chicago Boyz

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