A Better Idea

In an op-ed in the Wall Street Journal economist David Neumark has a better idea for increasing the minimum wage:

Minimum wages reduce employment of low-skilled workers, yet political support for minimum-wage increases is so strong that they seem inevitable. What to do? I have developed a proposal for a high-wage tax credit. The HWTC preserves the direct benefits of higher minimum wages—namely, higher wages for low-wage workers—while mitigating the harm.

When the government increases the minimum wage, the HWTC would provide a tax credit of 50% of the difference between the prior minimum wage and the new minimum wage for each hour of labor employed. It would phase out at wages above the new minimum wage and, as wage inflation erodes, the value of the new minimum wage.

The HWTC would accomplish three main goals. First, by offsetting part of the cost of higher minimum wages, it would reduce employers’ incentives to substitute away from low-skilled workers in favor of higher-skilled ones and machines. It would also moderate price increases that would otherwise lower product demand.

Second, it would transform the minimum wage into a more sensible redistributive policy. Most redistributive policies transfer money from high-income households to low-income ones via the tax system. The minimum wage, by contrast, takes money from business owners, who may not have high incomes themselves. By operating through the tax system, the HWTC would transfer some of the cost of higher minimum wages away from owners of businesses like child-care centers and restaurants, and toward high-income taxpayers.

Third, the HWTC would encourage better decision making about alternative policies to combat inequality. Voters think income inequality is too high, and politicians who want to keep their jobs must respond. Raising the minimum wage sounds like a good way to reduce income inequality, even if other policies, such as the Earned Income Tax Credit, do more to help the poor. By shifting some of the cost of higher minimum wages to taxpayers, the HWTC would put the minimum wage on a more equal footing with other redistributive policies. Policy makers and voters could then choose among alternative policies based on their actual benefits, rather than their misperceived costs.

I have an even better idea. Why not pay for the increased minimum wage through a tax surcharge? Put a question on the 1040: do you believe the minimum wage should be increase to $15/hour? For each person answering “yes” to that question add a surcharge to their gross taxes, i.e. after all deductions, etc. have been taken and tax calculated, in the amount of the estimated number of people eligible for the minimum wage increase times the difference between the present minimum wage and $15 per hour divided by the estimated number of people who answer “yes”. Rather than having “taxpayers” pay the tax, have those who support the change pay the tax. It would not only be direct democracy it would be be evolution in action.