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Thursday, January 04, 2007

Should the Minimum Wage be Linked to Tax Cuts?

President Bush's call for the two parties to work together in his op-ed in the Wall Street Journal was, in may ways, a list of things he won't cooperate on (read my op-ed, no new taxes!). But turning to an area where he does want to barter over policy, minimum wage legislation, Bush is insisting that reductions in taxes on small business be given as a cooperative gesture and as compensation for signing minimum wage legislation.

But there is opposition to linking these two issues. First, Jared Bernstein and Lawrence Mishel of the EPI:

Keep it Clean,  There's no good reason to lard the coming minimum wage bill with extraneous new tax cuts, by Jared Bernstein and Lawrence Mishel: It should come as no surprise that one of the first acts of the 110th Congress will be legislation to raise the minimum wage. A bit more surprising is the endorsement by President Bush, who recently announced that a minimum wage increase was a policy on which he and the incoming Democratic congress could "work together."

Unfortunately, his cooperation comes at a cost. To the president, "working together" ...  means … guess what? … more tax cuts. There's every reason to keep this minimum wage bill clean and little rationale for tax cuts.

Bush's stated motivation for accompanying cuts is to avoid "punishing" small businesses, by offsetting the increase in their labor costs with "targeted tax and regulatory relief." Since all low-wage firms face the same increase (and thus no one firm is at a competitive disadvantage) ..., "punish" seems like an awfully strong word. Nevertheless, recent history suggests that any such offset will cost much more than the wage increase and will not be effectively targeted at low-wage employers. ...

The ... last increase -- from $4.25 to $5.15 -- ... passed with some tax cuts served up by the Gingrich Congress that Clinton had to swallow..., but legislators and the public should recognize that this pairing of tax cuts and minimum wage increases is not the norm: neither the 1990 increase under Bush I nor any others were passed with tax cuts. Raising the minimum wage is a very simple piece of work; most bills are literally a few paragraphs long. And the increase has virtually no budgetary impact.

Tax cuts, on the other hand, are costly, and history shows they are not likely to be well-targeted. ...

In 2000, the GOP leadership added these bright ideas to a proposed minimum wage increase: a reduction in the estate tax, increased write-offs for business meals and for business investments, tax breaks for timber companies and for tax-exempt bonds, a higher self-employment health deduction, and expanded enterprise zones. Whatever their merits, neither the legislated tax cuts in 1996 nor the proposed tax cuts in 2000 were "targeted offsets"...

And by the way, if raising the minimum wage has to be offset by small business tax cuts, shouldn't its real decline be offset by tax increases? Democrats in the new Congress will insist that any new tax cuts be paid for. Where's the revenue coming from?

No matter. Neither symmetry nor fiscal prudence are in play here. And we suppose you could write this off as the predictable horse-trading we're likely to see over the next few years. No one should be fooled, however, that a new bundle of tax cuts is either warranted or related to the much-needed minimum wage increase. So, Mr. President, let's keep it clean.

Next, Robert Reich agrees:

Congress Should say No to New Tax Cuts Tied to Minimum Wage Increase, by Robert Reich: The President says he wants to work constructively with Democrats. We'll see. One of the first items of business when the new Congress convenes will be to increase the minimum wage... The President says he’ll sign the bill -- but only if it contains new tax breaks for small businesses that will offset the increased cost resulting from a minimum-wage hike.

Congress should pass the minimum wage increase without any small-business tax break. Small businesses don’t need new tax breaks because the minimum wage increase won’t actually impose new burdens on them.

First, virtually all small businesses that pay the minimum wage compete in the local service economy. They’re retailers, contractors, providers of elder care and child care, local hospitals. They don’t compete internationally or even nationally. Their competitors are in same city or town, and all of them will be paying the same minimum-wage increase. So it’s likely that the increase will be passed on to consumers.

Besides, it’s not really an increase anyway. The current minimum wage was enacted ten years ago, and inflation since then has eroded its value so much that the new proposed minimum is more like an inflation adjustment than a real increase. Most small businesses charge prices that have risen with inflation. It’s only fair that their employees’ wages should rise with inflation, too.

In fact, a minimum wage hike may actually help small businesses. Evidence from states that have already increased their own minimum wages suggests that a modest increase convinces more people to enter the labor market – people like retirees, spouses, or teenagers who wouldn’t bother working at a lower minimum wage. With more people willing to work, small businesses have more choice of whom to hire. That means they can find more reliable employees, and reduce costs associated with turnover.

The nation can’t afford a tax cut anyway. That’s why Democrats have pledged to restore fiscal responsibility by requiring that any new tax cuts be fully paid for.

Maybe this is why the President says he’ll sign the minimum wage increase if it’s tied to a tax cut for small business. He knows that if the Democrats are true to their word, there can’t be any such tax cut. But he also knows how popular the minimum wage increase is. So by tying the two together, he can say he’s supporting the minimum wage and then veto it anyway.

It's possible to make the tax-system more efficient through restructuring. If the tax cuts and regulatory relief for small-business are balanced by an increase in taxes somewhere else, and it is good public policy for efficiency or equity reasons, then the tax-shift ought to stand on its own but there would be no harm in linking the two together.

If it's not good public policy as seen through the eyes of Democrats, then I'd send Bush the few-paragraph version with just the minimum wage legislation and dare him to veto it. At the same time, explain that Democrats will support small business relief so long as it is balanced by increases elsewhere. Things like farm subsidies come to mind as potential revenue offsets.

    Posted by on Thursday, January 4, 2007 at 12:24 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (30)

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