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Minimum Wage, Maximum Pork


By Max B. Sawicky The House of Representatives recently voted to increase the minimum wage, but the measure is being held hostage in the Senate by demands for tax relief for small businesses supposedly burdened by the wage increase. That may sound fair to some, but a closer review shows the tax provisions are clearly more inspired by politics than credible equity considerations or sound economic reasoning.

Yes, a minimum wage hike will have effects. An increase to $7.25 an hour could directly benefit nearly 6 million workers, lifting the incomes of many families currently under the poverty line or not far above it. But critics also claim the boost, estimated to cost employers about $13 billion annually, would result in higher prices and fewer jobs. That's far from certain, and raises an important question: Who would be harmed, and, if they are, should they receive compensation?

Certainly, some companies will be forced to raise wages. But there is no precise way for government to predict which ones will be affected or by how much. Nonetheless, the Senate bill provides liberalized depreciation rules, kinder tax treatment of "S corporations" (which reap many benefits of incorporation without being liable for the corporate income tax), and an expansion of the Work Opportunity Tax Credit as compensation for paying low-wage workers more.

But the proposed breaks pertaining to depreciation and S corps could just as easily benefit owners not affected by the wage increase, those helped by it (say, high-paying restaurant owners whose lower-paying competitors would be forced to raise salaries), or even people who don't currently own a small business but invest in one in the future. In fact, the tax cuts could benefit a business with no minimum-wage employees—or one with no employees at all—because they're unrelated to labor costs, past, present or future.

The more generous treatment of depreciation allows a business to get larger deductions for the purchase of capital equipment or improvement of its facilities. That means, in effect, returns to new investment would be subject to lower taxes. But under the Senate bill, this new investment can be undertaken by anyone, and has nothing to do with whether the minimum wage hike affected the benefiting taxpayer.

Even worse, the tax breaks have nothing to do with whether minimum wage workers are retained or added. New investments might well require more workers, but not necessarily low-wage ones. Or the tax break could make feasible an investment that reduced an affected employer's labor costs, allowing him to substitute capital for labor. In that case, it's the tax break, not a higher minimum wage, that levies a terrible cost—on the worker.

The Senate bill provides new tax breaks for S corps on the grounds that, since they're small, they'll be hurt by a minimum wage hike. In reality, lower-wage workers are spread across businesses of all sizes. And while S corps are usually small, that doesn't mean their net income is low or their owners poor. At S corps with receipts exceeding $50 million, for example, average net income per shareholder exceeded $1 million in 2003.

At least the third provision of the Senate bill, the expansion of the Work Opportunity Tax Credit (WOTC), relates to the minimum wage. The WOTC provides subsidies to employers who hire welfare recipients, veterans receiving Food Stamp benefits, ex-felons, high-risk youth, and other disadvantaged persons. Many such workers earn the minimum wage. But, unfortunately, participation rates in WOTC are low, and its impact on employment is questionable. Indeed, recent research concludes the current Earned Income Tax Credit is more effective in bolstering low-wage workers.

Given the flawed logic behind the Senate proposals, why is Congress even talking about them as compensation for a minimum wage hike? In a word: politics. Everybody in Washington knows these tax cuts are just pork, no less than past earmarks for such boondoggles as Ohio's National Packard Museum or Alabama's statue of Vulcan, the Roman god of fire. But rising concern about poverty and income inequality lends support to increasing the minimum wage without considering extraneous tax policy issues. Indeed, these tax cuts would never stand alone, so they ought not stand at all.

Views expressed in Outside Shot are solely those of contributors.

Max B. Sawicky, an economist at the Economic Policy Institute, is on the board of Americans for Democratic Action. He blogs at http://maxspeak.org/mt.


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