Happy Labor Day! While getting ready to put in your token appearance at work today before you head for the lake, you may want to ponder the hot “labor” issue of the moment — the minimum wage and its alternatives.
In spite of claims otherwise by supporters, a minimum wage has to cause job losses for the least skilled and connected. That’s part of what it was originally meant to do. If raising the price of wages didn’t affect how much labor is purchased, you could set a $100 per hour minimum wage. That, is, of course, absurd. So advocates have to argue that somehow small increases in the minimum wage are worth the job losses because of the benefits for those who keep their jobs, or that there are no job losses.
Recognizing the weakness of these arguments, many economists argue that an increased Earned Income Tax Credit is a better way to support the working poor. For example, in The minimum wage versus the earned income tax credit for reducing poverty, Cornell University economist Richard V. Burkhauser states:
Introducing or increasing a minimum wage is a common policy measure aimed at reducing poverty. But the minimum wage is unlikely to achieve this goal. While a minimum wage hike will increase the wage earnings of some poor families and lift them out of poverty, some workers will lose their jobs, pushing their families into poverty. In contrast, improving the earned income tax credit can provide the same income transfers to the working poor at far lower cost. Earned income tax credits effectively raise the hourly wages only of workers in low- and moderate-income families, while increasing labor force participation and employment in those families.
The argument for a perfect earned income tax credit is compelling, but the credit is far from perfect. It is estimated that around 25% of the Earned Income tax credit paid out is paid improperly, including billions in fraud. Earned income tax credit fraud is a big part of the business of corrupt preparers. Many other taxpayers who could properly claim it fail to because of its complexity.
Even if the waste and fraud problem could be solved or overlooked, a properly-functioning EITC is still a poverty trap. The credit phases out as incomes rise, creating a high effective marginal tax rate on each additional dollar earned by a low-income family. It provides help at low income levels, but it discourages improving those income levels.
The marginal tax rates get even worse when phase-outs of other income-based benefits are taken into account.
Arnold Kling is a proponent of a “Universal Benefit” providing everyone a basic amount of income in place of the current array of welfare benefits:
One of the advantages of a universal benefit is that you give the money to everyone. My idea is that you would then tax some of it back at a marginal rate of 20 or 25 percent. That is, for every dollar that someone earns in the market, they are lose 20 cents or 25 cents in universal benefits. Compared to a marginal tax rate of zero, 25 percent is more complex and has a disincentive. But it is much less complex and de-motivating than our current system of sharp cut-off points for benefits like food stamps and housing assistance. And having a non-zero tax rate allows you to have a higher basic benefit at lower overall budget cost.
I’m not entirely convinced that giving everyone a benefit is wise, but it may be a better idea than what we have. It deserves consideration before we concede that a fraud-ridden and complicated EITC is the best we can do for the working poor.
Jared Walczak, Location Matters: Effective Tax Rates on Call Centers by State (Tax Policy Blog). California is a surprisingly cheap place for this.
Robert D. Flach brings today’s Buzz roundup from the National Association of Tax Professionals Tax Forum in Philadelphia. Today he links to posts about small business survival tips and the flight of taxpayers from New York state.
Jason Dinesen, Glossary: Hobby Loss Rules, “This is important because deductions for hobbies are limited, whereas deductions are (generally) unlimited for business activities engaged in with a for-profit motive.”
William Perez, What the Recent Uber Worker Classification Ruling Means for Tax Professionals. It has tax implications that William ably discusses, but what it really means is that the government wants to protect well-connected taxi monopolies.
Kay Bell, Uncle Sam to pay $133 million to protect OPM hack victims. But at least they won’t send you a 1099 for the “value” they provide.
Robert Wood, IRS Offshore Account Penalties Increase, Hunt Continues. Offshore bank account secrecy is pining for the fjords.
Jack Townsend, Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program
Peter Reilly, Presidential Candidate Tax Plans Coming In Slow.
So someday–not any time soon–the IRS will finally be forced to answer the question that Koch Industries asked it five years ago, in 2010. The Obama administration’s strategy is always the same–stonewall, assert every possible theory, no matter how frivolous, and try to run out the clock. Whether an honest answer to the question will be given, years after the fact, is of course another question.
It’s worked for the IRS and the administration so far.
Howard Gleckman, Why Individual Tax Revenues Will Grow Even If Congress Doesn’t Raise Taxes (TaxVox):
Since 1985, income tax brackets have been adjusted for inflation so that someone whose annual raise tracks the Consumer Price Index is not thrown into a higher tax bracket. However, that adjustment doesn’t fully protect rising income from higher taxes.
In part, that’s because some key parts of the income tax are not indexed. They include the child tax credit, the surtax on net investment income, and the income ceiling for making contributions to Individual Retirement Accounts. But the real problem is that when income grows faster than inflation, it is pushed into higher tax brackets.
When they say the want to just soak the rich, that’s just to fool the rubes. It’s your pocket they want to pick.
Jenice Robinson, H&R Block Uses Corporate Lobbying Might to Make Sure the Poor Use Its Services. (Tax Justice Blog)Earned Income Credits are involved.
Career Corner. Please Don’t Be Like This Accountant Who Got Scammed Over Email (Caleb Newquist, Going Concern). “Yeah, it’s a little sloppy that a single email from a CEO along with a lone signature over a company seal would be enough to wire $737k.”