Sunday, February 2, 2014

The Minimum Wage is a Targeted Tax, Some Win, Some Lose.

The minimum wage can be considered as a direct tax on specific employers.  Here is the logic that supports this conclusion:

There is no doubt that government can tax employers based on criteria selected by government.  Assume that government claims a tax based on wages paid under a target wage.  Assume the target wage is $20 per hour.  An employer paying $14 per hour would calculate his tax by recording the hours worked at $14 per hour and multiply that number by $20 less $14  equals $6.

For example, if the employer had 2040 hours worked at $14 per hour, his tax would be 2040 * 6 = $12,240.  Government would get a check for $12,240, and could spend the money for purposes of government.

Now, the purpose of government could be to ensure every worker receives $20 per hour.  To that end, government could directly refund the entire tax collected to every worker who filed an income tax return.  The program could be called "The Fair Wage Recovery Program", and could be administered by issuing a refund to each worker equal to the claimed (and supported) wage deficit.

The purposes of government could be alternatively achieved by requiring all employers pay wages at the $20 per hour rate or higher.  This method would bypass the refund claim process.  Left unchanged would be some procedure to monitor employer paying practice and taxation verification.

It is safe to assume that the employer works for gain, with the expected gain to be an after-tax profit.  Periodically, the employer would make a decision as to whether continue business or discontinue business.  The size of the after-tax profit would be a major consideration in that decision.

Every employer would face the same decision of whether to continue business or not.  In every case, the after-tax profit is a major consideration.  With a uniform tax on labor for wages under $20 per hour, the labor component of every business could be calculated as if it were at least $20 per hour, with some business paying more if they could support the higher numbers.

One question often asked is the effect of the minimum wage on employment.  It should be safe to say that over a long time period of unchanged wage minimum, a steady pattern should evolve.  The minimum wage would become a standard yardstick for evaluating the cost effectiveness of laboring effort.  Jobs returning less than minimum wage would be a drain on the capital of the employer.

The economic effect immediately after implementation would reflect the shock impact of a sudden increase in wage.  Sudden price changes must be expected. Employers would require more capital to operate when the same number of employees generate an increased tax burden.  Employees-continuing-to-work would have increased income allowing them to change their spending patterns.  To the extent that workers actually receive more average income, everyone would see increased competition for consumptive goods, which might result in higher prices and higher employment.  Higher prices and increased competition for consumptive goods would be noticeably negative for retired people on fixed income.

The measurable short run effect would be a balance of the forces identified above and more.  Each effect would act over a different time frame with the result that employment is likely to become unstable during an adjustment period.  Following the adjustment period, employment should return to the original distribution that existed prior to the minimum wage change.

The change in minimum wage, when considered as a tax, can be seen as a shift in standards. Shifts-in-standards are particularly difficult for people who lived, worked, and saved under one standard, only to find that new standards have been put into place as they retire, much to their disadvantage.

In this analysis, changes such as the minimum wage change are seen as a shift between two economically referenced plateaus, each with stable characteristics.  The final winners and losers are found by locating participants within age groups, with each winner being able to adjust to the new conditions and each loser being unable to adjust advantageously to the new conditions.

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