Naturally, Mitt is being called a flip-flopper by those who disagree with him about raising the minimum wage. I understand where he’s coming from, and I believe he needs to think outside the box about this topic more. Take a walk with me. This will be a good read!
When you really think about it, raising minimum wage is also an increase in Federal and State income at the cost of business and employee wellbeing. Sure, people say that 47+% of people don’t pay taxes, but that’s not entirely accurate as all employers AND employees must pay Social Security, Medicare, and unemployment (all of which are related to the amount the employee is paid), not to mention sales taxes and the litany of other fees (i.e. vehicle registration fees) that varying government entities charge. Go rent a car, and you’ll see you’re paying more in taxes than the actual cost of the vehicle. But I digress.
There have been some arguments recently that paying such a low minimum wage means that more money is paid in welfare. It’s debatable, but certainly a reasonable argument. In short, the argument means that taxpayers/consumers are substituting higher prices (which is what many people say will be the result of raising the minimum wage) with higher taxes. In other words, raising the minimum wage would result in higher prices by businesses to offset the increase costs of employment, but it would reduce the reliance on government welfare programs. Since government welfare programs are paid with taxes, our taxes are higher because companies are paying minimum wages that equal income that’s below the poverty level. Ultimately, taxpayers are subsidizing companies that don’t pay a higher wage. Of course, it can’t be argued that the welfare programs shouldn’t even exist, but that’s not something I’m going to get into in this blog.
Here’s an alternative to minimum wage.
First, change the federal tax brackets so that anyone making less than $22K/year (excluding deductions) doesn’t need to pay any of the federal taxes. That means, no federal income tax, no Social Security, and no Medicare. That’s a significant jump in the current lowest tax bracket.
If politicians are really interested in minimum wage earners having more money in their pockets, then they should stop taking so many taxes from them! Social Security is a massive tax that has no regard for income level. In fact, Social Security taxes stop being taken once your income exceeds $117K. So, the impact on low wage earners is significantly higher than with high income earners.
Second, put the entire tax of low wages on the employer. If the employer wants to pay less than $10.10, they must pickup the entire tab for the entire current federal income tax, Social Security, and Medicare. Employers already pay half of the Social Security and Medicare taxes. In essence, the tax brackets remain the same, the 10-15% is now paid by the employer instead of the employee, and rather than the employer just matching the employee Social Security it is paid entirely by the employer for anyone making less than $10.10/hour.
This will provide an incentive to employers to pay a higher wage, and if they don’t at least the low wage earner isn’t burdened by the federal government with a disproportionate tax burden.
Ultimately, the low wage earner will have take home income equal to their actual pay as opposed to 10+% less than what they make from federal taxes draining their take home pay. If the goal is to raise the living standards for low wage earners, then the government needs to stop taking tax money out of their pockets at a disproportionate rate. It also simplifies tax filings for low wage earners, saving them money and reducing overhead on the IRS. They have a W2 (or more, as is often the case) that shows they earned less than $22K/year and don’t have to file anything other than a tax return with a signature. No going through deductions, tax credits, etc. They simply have a zero % and zero $ tax burden. They receive 100% of all the money the earn.
Employers already have payroll systems in place that make all the tax deductions from an employee’s paycheck, so there is really limited tax filing overhead by the employer. The only thing they would need to deal with is what I outline in the fourth item.
Third, pressure states to erase their state income tax on anyone making less than $10.10. This is pretty easy to do for the federal government. If the states don’t increase their lowest tax bracket, they don’t get federal funding. It’s has been used often in the past and works well. The states could also lessen the burden on low wage earners by completely eliminating their unemployment tax. Put the entire burden on the employer.
The bottom line would be that someone being paid today’s minimum wage of $7.25 would take home that entire $7.25. That’s roughly $15K/year in take home pay or $1280/month, which is above the poverty line. And remember, that’s with today’s minimum wage of $7.25. With two income earners making $7.25, that would put the take home income at roughly $30K/year, which our Federal government states is enough for 6 people to be in a household and be at the poverty level.
Fourth, provide employers with a reduced tax burden with higher wages.
This is the opposite of the graduated tax system we have in place now. One of the ideas behind the graduated tax is that higher wage earners are subsidizing lower wage earners, so they need to pay higher taxes. With the changes I outline above, it goes the opposite direction because the money is going directly to the lower wage earners rather than first going through the middleman known as Uncle Sam. This means reduced government overhead and spending with a larger amount of money going directly into the pockets of those who need it the most. It stands to reason that as the employer gets more and more towards the $10.10 federal goal, the amount of employer paid “employee tax” should decrease.
This also would lead to lower taxes at each of the current tax brackets as the welfare subsidization would go away on income taxes. It would be interesting to see just how much federal income taxes would decrease for everyone else by removing Uncle Sam as the middleman.
Of course, you might be thinking that this is just a rose by another name. This just puts more of a burden on the employer and will lead to fewer jobs, higher prices, and everything else that’s been thrown out over the years when raising the minimum wage comes up, right? Ultimately, the cost is higher to the employer, and the employer must figure out some way to offset that cost. There’s no escaping that. However, this deals with increased costs to the employer in a very different manner as you will see below.
If you examine a mandatory increase in minimum wage, you find that this increases the burden on both the employer and the employee in a larger amount than with what I have outlined above. Increasing the minimum wage to $10.10 means that all the overhead taxes (Social Security, Medicare, Unemployment) increase for both the employer and the employee. The employee has a nominal increase in their take home pay (since the government is still taking the same percentage of money out of their pockets). This means that government welfare is needed on a larger scale than with what I outlined above.
Given what I have outlined, anyone working a full-time minimum wage job (under today’s minimum wage of $7.25, not even the increased $10.10) is no longer under the poverty level. The additional cost to the employer is roughly 10-15% plus 15.3% (that’s the current federal tax brackets for lower wages and Social Security and Medicare being fully paid by the employer as opposed to split).
What I have outlined is roughly a $9.09/hour to $9.45/hour cost to the employer.
Depending on what the states do, it would increase more, but even California (with some of the highest income taxes on everyone) won’t get the cost to an employer over $10.10 for low wage earners. Also, don’t forget about the “overhead taxes” I mentioned earlier that mean a $10.10 minimum wage is really much higher for the employee and the employer.
Ultimately, what I have outlined is considerably less than the goal of $10.10/hour, yet it pulls every full time minimum wage employee above the poverty line and a family of six with two full time minimum wage earners above the poverty line.
This also doesn’t take into account the rapid lack of qualification (and realistically, demand) for welfare programs. Since the government is taking less money out of the pockets of low wage earners, they are now above the poverty line and able to improve their standard of living without taking money from welfare programs. Important programs like Social Security, Medicare, and Unemployment are still funded. Still, the cost is less than $10.10/hour for the employer, and as the employer raises their employee wages above $10.10/hour, their total tax burden decreases.
Also, the tax burden on other taxpayers (the elusive middle class) would go down. Take this to mean that tax bracket percentages decrease or that federal debts are paid down and budgets balanced or anything else that make sense with a reduced total tax burden. This system requires less IRS and less federal and state government welfare, while putting more money in the hands of low wage earners and all others who are paying taxes.
One last benefit! This solves one of the biggest issues for the perception of the “1 percenters” in that “they don’t pay their fair share of taxes”. Despite the reports that show that top income earners pay a disproportionate percentage of the total income taxes, it is often stated that the “1%” doesn’t pay their fair share. With this setup the lowest wage earners pay no share of income taxes, so it stands to reason that the top 1% would certainly be paying an even greater share of the taxes.