The federal minimum wage is $7.25 per hour. Think about that. There are 40 hours in a work week with no over time and there are 52 weeks in a year. If you make $7.25 per hour, your annual salary is $15,080.00. Furthermore, the federal minimum wage has not increased since 2009!
Conservatives often espouse that raising the minimum wage kills jobs. For decades, the main argument conservative policymakers and business leaders have been making against raising the federal minimum wage is that it will bring about economic doom in the form of massive job losses. In 1980, then-Governor Ronald Reagan declared that “the minimum wage has caused more misery and unemployment than anything since the Great Depression.” Today’s conservatives seem to agree, with Ted Cruz warning that “every time we raise the minimum wage, predictably what happens is a significant number of people lose their jobs.” Speaker Paul Ryan has dared to get specific with his doomsday predictions, saying “when you raise the minimum wage, you’ll lose over a million jobs.”
Ironically, there is a way to use something that conservatives love to address wages: taxes. Specifically, tax cuts. Did you know that the company that you work for deducts your salary from their taxes? Salaries and wages are a business expense. How can we use taxes to affect wages?
Generally, taxes are used to modify behavior. For example you can write off the interest you pay on your mortgage, but not your rent. The government is incentivizing home ownership. In the case of businesses, one can write off the acquisition of new equipment for a period of time. This incentivizes the update of aging equipment.
How are taxes and salaries related and how can we balance the conservative orthodoxy of lowering taxes and allowing the market to control wages? These seem to be completely at odds with one another.
Progressives want to raise wages so people have more to contribute in a consumption driven economy. Also, they want higher taxes to fund progressive agenda items like healthcare for example. Conversely, conservatives want lower taxes and lower wages. They believe that the government should be as small as possible thereby eliminating the need for taxes. They believe in personal liberty, pull yourself up by your bootstraps, etc. Furthermore, businesses should compete for the best talent thereby eliminating the need for minimum wages. If you are talented, the market will pay you what you are worth.
What if there was a way to marry both of these theories? How can we take existing tax policy and use it to incentivize businesses to not only pay higher wages, but also desire to pay higher wages without raising the minimum wage? Furthermore, is there a way to effectively eliminate the minimum wage without the fear of business driving down wages for citizens at the bottom of the socio-economic ladder? The answer to all of this is yes, and it’s simple.
If you know anything about legislation, it has to have a catchy and easy name that communicates the purpose of the law. Let’s use a buzzword that corporate America loves: WIN. We will call this America’s 21st Century Wages Increased Nationally Act. I love it already.
But wait. Wages increased nationally? That can’t be good. Corporate America will never go for that. Remember, conservatives hate raising minimum wages or telling their corporate donors what to pay their employees. This is where we tie this idea to the thing that corporate America and conservatives love more than anything: tax cuts.
So let’s use what they love to get what we want. Under current tax law, businesses can deduct 100% of the salary that they pay to their employees. This deduction has a 1:1 ratio. If a company pays an employee $30,000.00 per year, that company can deduct $30,000.00 from their gross income.
Let’s start with a simple example that demonstrates this idea. Remember in our example we have eliminated the federal minimum wage. However, we do know what the average income is in the country. According to the U.S. Census Bureau, the average salary in America was $56,516, or $27.17 per hour, in 2015. For context the average income for working Americans has been basically unchanged for more than 40 years further underscoring the need for a new approach.
So let’s use this as a baseline for this example. In 2021 if a business pays an employee $27.00 per hour, then that business can deduct 100% of that salary from their income. Now here’s the interesting part. One percent of $27.00 is .27 cents. So for every .27 cents that you pay any employee less than $27.00 per hour, you can only deduct that percentage on your taxes.
Let me make this simpler. Half of $27.00 is $13.50. If a business pays an employee half of the national average, they can only take half of the tax deduction. If company ABC wants to pay their employees $13.50 per hour, they can not deduct 100% of the salary. They can only deduct 50%. If a company wants to pay $6.75 per hour, they can only deduct 25% of that salary. There is a disincentive to pay an employee a lower hourly wage and it is tied directly to the company’s tax liability. Someone might be thinking, “If I pay 0, then it won’t matter as according to your formula I would not receive any tax benefit.” You are correct. Let me know when you find someone to work for zero dollars per hour.
But the reverse would also work. Again using $27.00 per hour as the baseline, if you pay your employee more you can write off more. The more you pay, the more you can deduct. Let’s say that company ABC decides to pay $29.70 per hour. That is 10% more than the minimum. Instead of letting the company deduct the same 1:1 ratio, the tax code could be rewritten to allow this company to deduct 115% of the salary paid for 5 years.
Let’s say company ABC decides to pay 125% more than $27.00 per hour, which would be $33.75 per hour. Instead of the employee making $56,516.00 per year, that employee would be making $70,200.00 per year. The tax deduction to the company could be 135% of the salary for 5 years.
This is a win-win. The employee is making an additional $14,000.00 per year, and the company is subsidized for making the investment in their workers like an acquisition of equipment or a new factory. The economy will benefit from the increase in consumption, and the federal government will in the long term benefit from the additional tax revenue.
The baseline for this program can be indexed to the average salary so that it works in perpetuity. This should satisfy conservatives. The minimum wage is eliminated and has been replaced by a market based solution. Progressives should be happy because wages have increased, and there is more tax revenue to fund their ideas, of which we should need fewer as wages have increased.
This tax idea can be used for healthcare, retirement, and any other initiative that we prioritize. Imagine that you and your family want to buy a home. You need to use the FHA program because of its 3.5% down payment loan. Your company can provide a gift to you for the 3.5%. Because the company is making an investment in its employee, your company can write off 200% of the gift. This symbiosis will create corporate investment in its employees and the communities where its employees live. This will engender more employee loyalty and increase tenure. The benefits of this kind of new corporate investment could transform the country for generations to come.
Of course this could not extend to C-Level officers of corporations, members of boards, etc. Truth be told we already did this for high level executives. CEOs started taking the majority of their compensation as stock in the 80s and 90s. Why? Because the taxes on dividend income was lowered to 15%. The idea behind it was that companies already paid income on their corporate profits, so it is in effect double taxation to tax shareholder profits.
CEOs quickly figured out that given the choice of a multi-million dollar salary where they could be taxed as much as 39% on a W-2, or dividends paid on shares of stock taxed at 15%, they chose the latter. Lowering capital gains taxes to encourage investment in the stock market might have been necessary at the time. That time has passed.
It is time to redistribute income fairly among Americans, and we can use the tax code to do it. It’s time for Americans to have a WIN. What do you think about this strategy to use the US Tax Code to help employers, employees, and the economy?