Feb 11, 2020
Using Employer Tax Incentives To Raise Wages For Unskilled Workers
By David Grace (www.DavidGraceAuthor.com)
The median household income is roughly $60,000/year and a year’s full-time work is 52 weeks X 40 hours/week = 2,080 hours. That works out to an hourly wage of about $28.85/hour.
What if we defined a “living wage” as one-half of that amount or $14.42/hour?
If we politically cannot increase the federal minimum wage to $14.42/hour, is there some way we can give employers an incentive to pay at least $14.42/hour?
Maybe.
If you can’t use a stick, what about a carrot?
Giving Employers A Tax Incentive To Pay A Living Wage
Example Numbers
Suppose a company had 100 hourly wage employees who worked 208,000 hours at the following pay rates:
- 100,000 hours by employees who were paid $10/hour; $1,000,000
- 24,000 hours by employees who were paid $14 hour; $336,000
- 44,000 hours by employees who were paid $18/hour; $792,000
- 40,000 hours by employees who were paid $22/hour; $880,000
Total gross payroll was $3,008,000
Change To The Tax Code
Suppose the following provisions were added to the corporate tax code:
An employer who has no employees whose hourly wage is less than one-half the median household income divided by 2080, the “Basic Wage”
— — may claim an additional deduction equal to 25% of all wages paid to employees earning less than the median household income divided by 2080, the “Cap Wage,” and
— — whose employees earning 150% or more of the Basic Wage ($21.63/hr) worked 40% or more of the number of hours worked by all employees earning less than the Cap Wage may additionally claim a further deduction equal to 25% of all wages paid to employees earning less than the Cap Wage.
An Example Of How This Tax Deduction Would Work
If this company raised the wages of its employees earning $10/hour and $14/hour to $14.42/hour its total payroll would increase from to $3,008,000 to $3,460,080, increase of $452,080.
In exchange it would get an additional tax deduction of $3,460,080 X 25% = $865,020. At a corporate tax rate of 20% that translates to a tax savings of $173,004.
In other words, it would cost the company $279,076 to increase the pay of its hourly employees by $452,080. 62% of the wage increase would be paid by the company and 38% would be paid by the taxpayers in the form of a reduction in corporate tax revenue.
To qualify for the second deduction, 40% of the 208,000 hours or at least 83,200 hours would need to be worked by employees earning between $21.63/hr and $28.84/hr. That means that the employees earning $18/hr would need to have their pay increased to $21.63/hr at a cost to the company of $159,720.
The new payroll total would increase to $3,619,800 and the company would get two deductions of 25% each for a total new deduction 50% X $3,619,800 = $1,809,900 X a 20% tax rate = $361,980 in tax savings.
That means it would cost the company a net amount of $249,820 to raise the pay of its low-level hourly employees by $611,800. About 41% of the pay increase would be paid by the company and 59% would be paid by the taxpayers.
Obviously, these example numbers would be different for every company, but they give a sense of how such a tax policy would work.
Why Not Give Employers A Tax Deduction Equal To The Entire Additional Cost Of Paying A Living Wage?
Why not change the percentages so that the entire amount of the increased expense of paying a living wage would be borne by the taxpayers?
Because:
- Businesses themselves should, by default, pay wages that are high enough so that their full-time employees do not qualify for welfare
- It’s a business’ job to pay the wages of its own employees, not the responsibility of the taxpayers.
- The idea of the government subsidizing the costs of private businesses is contrary to how a capitalist, market economy is designed to work.
- If you want the taxpayers to pay the entire additional cost of full-time workers’ being paid a living wage instead of their employers paying that cost, then it’s much simpler to create a scheme where the government just writes the employer a check every month equal to the difference between the hourly wage the company is paying and the living-wage rate so that the employee gets a partially government-subsidized paycheck at the living wage hourly rate.
Why would the right wing prefer giving businesses this additional tax deduction instead of merely setting the minimum wage high enough so that full-time workers would no longer qualify for welfare?
Because the right wing always wants to:
- Put more money into the pockets of the corporations’ shareholders and executives at the expense of the individual taxpayers,
- Transfer wealth from the individual taxpayers to the corporations.
Is That How Things Ought To Work?
Is that how a capitalist country is supposed to work, with the taxpayers writing checks to businesses so that the corporations’ shareholders and executives will have even more money and the taxpayers will have less?
I don’t think so.
If You’re Against The Taxpayers Subsidizing A Corporation’s Labor Costs Why Suggest This Tax Incentive Thing At All?
Much as I dislike taxpayers subsidizing the business costs of for-profit corporations, at least this sort of a plan would provide a material incentive to businesses to increase the wages of their lowest paid employees to somewhere between one-half and three quarters of the country’s median household wage rate and at least part of that cost would be paid by the corporations.
Why Do You Care What Unskilled Workers Earn?
Because a living wage is good for everyone including rich people.
Increasing the earned income of the bottom 20% of the working population would greatly benefit the whole country with a stronger economy, less welfare, less crime, and in lots of other ways.
For a detailed discussion about why increasing the wages of the bottom 20% of workers is actually good for everyone, including rich people and most businesses, see my column:
The Poorer The Bottom 20% Are, The More Money It Costs The Rest Of Us
Why Do Some People Hate A Living-Wage Minimum Wage?
If all working Americans would be more prosperous if there were a living-wage minimum wage why is there such opposition from the right wing to a minimum wage that is high enough so that full-time workers won’t qualify for welfare?
I think that the real reason many conservatives hate the idea of paying full-time workers enough money so that they no longer qualify for welfare is that they believe that unskilled labor has a low inherent value and that unskilled workers don’t deserve to be paid enough money to live on, that it’s morally wrong to pay people more than the least amount that they are so desperate that they have to accept.
The real reaction of many on the right to any proposal for a living-wage minimum wage is: How dare people insist that work that is so simple that any dumb-ass, moron, loser could do it be compensated at a rate that is high enough to support a family!
But, the idea that a good or service has some inherent value based on its usefulness, complexity or difficulty is absolutely, factually wrong.
The Price Of A Good Or Service Bears No Relation To It’s Difficulty Or Usefulness
The market price for unskilled labor bears no relationship to the difficulty, complexity or usefulness of that unskilled labor. The market price for all products and services has nothing whatsoever to do with some inherent theoretical value of the good or service.
In the real world, the market price for a good or service is totally based on the bargaining power of the seller versus that of the buyer, not some abstract concept of the product or service’s inherent value, difficulty or usefulness.
For a detailed discussion of the difference between what something is “worth” and its market price, see my column:
The market price only reflects the bargaining power of the buyer versus that of the seller.
The buyers of unskilled labor have vastly more bargaining power than the non-unionized sellers of unskilled labor and the buyers’ huge imbalance in bargaining power is the reason for the low price for non-union unskilled labor.
Better Than Nothing
So, why are you proposing this tax-incentive idea as an alternative to raising the federal minimum wage?
While I believe that it’s a business’ obligation to pay their full-time employees wages that are high enough that their employees do not qualify for welfare programs, if political realities leave us in a world in which businesses are able to shift a portion of their labor costs for their full-time employees onto the taxpayers, then it’s better for the taxpayers to bear only part of that burden rather than for the taxpayers to pay all of it.
— David Grace (www.DavidGraceAuthor.com)
