Raise the Minimum Wage or Cut Low-Wage Taxes?

by Polly Cleveland | February 17, 2013

My son is a low-wage worker, a short-order cook. President Obama just called for an increase in the federal minimum wage from $7.25 to $9.00 an hour. Yet he made no effort to save the “temporary stimulus” 2% payroll tax cut, which expired at the end of 2012. That will cost workers like my son about a week’s gross pay over a year—not insignificant when you’re barely scraping by. So what’s better for low-wage workers: an increase in the minimum wage or a decrease in payroll taxes?

Although my son went to culinary school and trained as a pastry chef, he has been unable to find work paying more than nine or ten dollars an hour, and not full time either. Typically, when volume slows, his bosses send him home; he’s lucky to get 30 hours a week. Those bosses—small business owners of restaurant franchises—also struggle to survive. Hurricane Sandy flooded out my son’s last employer.

Conservatives claim that a minimum wage increase will cause job loss. Jared Bernstein disagrees. He cites studies showing that a modest increase in the minimum wage, one that only affects a few percent of workers, won’t increase unemployment rates. Minimum wages, he says, also set a standard when there’s a range of possible wages. I agree with Bernstein. However, speaking from my son’s experience, there may be a reason why most studies show little effect: employers often cheat by paying employees for fewer hours than they actually work. The nominal wage may go up, but the effective wage remains the same.

Payroll taxes aren’t so benign. That’s especially true for small businesses like my son’s employers, where staff payroll is the biggest cost. The minimum wage, nominally at least, only affects the division of revenue between employer and employee. Payroll taxes take a big bite out of the total revenue before it’s divided. In 2013, Social Security takes 12.4% for wages up to a $113,700 cap. There’s another 2.9% for Medicare, with no cap. Then there are tax nibbles for Federal and local unemployment and disability. The Affordable Care Act will add further costs. Regardless of the exact share as between boss and worker, payroll taxes encourage workers to drop out, and employers to hire fewer workers and squeeze them harder, or to automate, or simply to fail.

Besides taxes, other costs loom extra-large for low-wage workers. My son, who lives with his girlfriend and their child on Long Island, now commutes to a job in Manhattan. He pays $250 a month for a rail pass and walks fifteen blocks to the restaurant to save subway fare. That $250 alone comes to a quarter of his monthly gross of about $1000. Why does he do it? Why not hang out at home, taking odd jobs off the books? Why? My son takes great pride in his restaurant expertise, and greater pride in supporting his family and paying taxes like a good middle-class American. He doesn’t even spend the allowance I give him; he’s saving it up for his son.

The proposed federal minimum wage increase will at best benefit a small number of workers, and only until inflation wipes out the real value of the increase. If President Obama really wants to help the working poor, he should propose to mitigate payroll taxes. There are two obvious ways. First, lower the rates—making up the difference by extending the tax to all income beyond the $113,700 cap. Second increase the Earned Income Tax Credit for low wage workers. Both changes would make the tax system more progressive and less destructive.

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