Liberals’ Employer Tax Scheme in Lieu of $15 Minimum Wage Is as Crazy as It Is Convoluted

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Despite repeated setbacks—including opposition from some Democrats—to liberal lawmakers’ deeply flawed push to raise the minimum wage to $15 an hour, proponents continue their desperate search for roundabout ways to force through that mandated nationwide minimum.

The first blow came when the Senate parliamentarian ruled that a $15 minimum wage could not be included under reconciliation on a spending bill, which allows for a simple 51-vote majority, rather than the usual 60. 

Next, some senators came up with an idea to impose a punitive 5%-of-profits tax on corporations that didn’t pay the lawmakers’ desired minimum wage. That idea was quickly abandoned.

Another strike came when eight Democratic senators voted against an amendment from Sen. Bernie Sanders, I-Vt., to include a $15 minimum wage in the $1.9 trillion coronavirus so-called stimulus package.

Senate Majority Leader Chuck Schumer convened a meeting with other Democratic senators—including those who voted against Sanders’ amendment—to try to rally them to unified support, but as the Punchbowl reported, “The meeting didn’t change anything, and it just served to highlight some of the rifts in the Democratic Caucus.”   

There’s also the fact that Gene Sperling, who President Joe Biden appointed to oversee implementation of the $1.9 trillion coronavirus package, previously advised against a vastly smaller proposed increase in the minimum wage back in 1998. Sperling served as director of the National Economic Council under President Bill Clinton and authored a memo to Clinton cautioning against a proposed 40% increase in the minimum wage.

Sperling said that a 40% increase had “no support among your advisors” and noted that “if the minimum wage were raised too much, it could cause disemployment among some of the most vulnerable participants in the labor market—from African American males to teenagers and former welfare recipients.”

At the time of Sperling’s memo, the economy was booming and unemployment was at 4.6%. Now, the economy is recovering from the coronavirus pandemic, unemployment is at 6.2%, and policymakers have proposed a 107% increase in the minimum wage and a 604% increase in the tipped minimum wage (which applies to many workers in the hard-hit restaurant and bar industries).  

Nonetheless, a pair of liberal economists at the University of California at Berkeley have a new idea for how Democrats can achieve their desired end without the support of a filibuster-proof 60 senators.

They contend that lawmakers can use tax policy to raise wages. If that sounds perverse, it is. After all, economists widely recognize that employers respond to higher employment taxes by reducing workers’ wages and employing fewer workers.

This would be no ordinary tax, however.

Good tax policy seeks to collect the minimal amount of revenue necessary to finance government in the least economically distorting way.

In contrast, this convoluted “aspirational living wage” tax aims to achieve liberals’ socially desired outcomes by micromanaging businesses’ operations in incredibly destructive ways that would reduce total family incomes, increase prices, and lead to a smaller and less productive economy.

The proposed tax would apply to the gap between what employers pay lower-wage workers and what certain politicians deem the “aspirational living wage,” with the proceeds of the tax then given back to employers with a mandate to return it to low-wage workers as a credit.

In other words, it’s like Obamacare’s employer mandate on steroids.

Unlike the employer-mandate penalty or tax that applies when employers with 50 or more employees fail to offer minimum essential coverage to 95% of their full-time employees, the “aspirational living wage” tax has no exemptions for smaller companies (except an administrative safe harbor only if they pay all their workers what they would otherwise get after administering the tax), nor for part-time workers.

Moreover, Obamacare’s employer-mandate penalty is a fraction of the cost of providing health insurance. It ranges from $2,570 to $3,860 per worker, while health insurance averages $7,500 for single coverage and $21,400 for family coverage.

The “aspirational wage tax” would amount to 100% or more of liberal lawmakers’ desired wages. 

Without any adjustment for actual living costs, the proposal would apply an increasing tax rate—starting at 20% in 2021 and rising to 80% in 2023—with employers having to calculate and pay the tax, and presumably remit it to the IRS. The IRS would then send it back to employers and require them to credit it to their low-wage workers, either as a one-time payment at the end of the year or with the option of providing recurring credits.

It’s worth noting that a similar administrative program was abandoned at the recommendation of President Barack Obama because of “poor design” and “compliance problems.”

Administratively complex is an understatement of this Rube Goldberg-style wage tax. And it doesn’t stop there.

Since the designers of the proposal noted that a 100% tax “might run afoul of reconciliation rules,” they suggest that policymakers could achieve a $15-per-hour federal minimum wage by setting the aspirational wage to $17.25 and applying a 77.5% tax.

Employers who pay the current federal minimum of $7.25 per hour would be subject to a $7.75 tax (that is, $17.25 minus $7.25 = $10, and $10 x 77.5% = $7.75), which would then be returned to the worker in the form of a credit, resulting in a final wage of $15.

But it turns out that doesn’t actually achieve the designers’ stated goal. A flat percentage tax would actually result in a range of effective minimum wages, with a $7.25 wage converting to $15 after the credit.

In similar fashion, a $15 wage would convert to $16.74 ($17.25 minus $15 = $2.25, and $2.25 x 77.5% = $1.74). It would continue all the way up until employers paid $17.75, meaning the pseudo-$17.75 “aspirational living wage” set to achieve the actually desired $15 minimum wage would actually become a minimum wage range of $15 to $17.75 per hour.

Then come the other tax complications. Since the proposal takes a tax and treats it as a wage, it follows that it would be subject to employer and employee payroll taxes and employee income taxes.

If it were not treated as wages, it would cause inequities wherein individuals with earnings slightly below the aspirational living wage would have higher take-home pay than individuals with earnings right at or slightly above the aspirational wage.

Taking into account employers’ payroll taxes would require the 77.5% tax to become 83.4% instead.

In reality, employers would be unlikely to waste their time and resources complying with a new punitive tax. Instead, they would just figure out ways to not pay any workers below the new “aspirational” wage—including laying off low-skilled and inexperienced workers, automating low-wage jobs, raising prices, or potentially even going out of business.

If that’s true, and the tax doesn’t actually score as raising revenues, it might not comply with reconciliation rules, and Democrats’ underhanded  attempts could all fall apart again.

Policymakers should stop wasting time on tortuous attempts to provide select workers with shortcuts to wage gains and instead focus on policies that would provide lasting income gains without hurting others.

Education and experience, coupled with technological innovation, are what help workers climb the income ladder.

Since a $15 minimum wage makes getting an education less attractive to young workers, and makes employers more likely to hire only already-experienced workers, it goes against the grain of real and lasting income gains.

Not surprisingly, that’s why the Congressional Budget Office estimated that a $15-an-hour minimum wage would result in 1.4 million lost jobs, lower total family incomes, reduced productivity, higher prices, and a smaller economy.

Policies expanding alternative education options such as apprenticeships, eliminating unnecessary occupational licensing requirements, and protecting individuals’ freedom to pursue alternative work arrangements provide solid pathways to lasting income gains without unintended consequences.

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