There are a thousand hacking at the branches of evil to one that is striking at the root, and it may be that he who bestows the largest amount of time and money on the needy is doing the most by his mode of life to produce that misery which he strives in vain to relieve. – Henry David Thoreau

Wal-Mart Tax?Argh! I’ve seen a lot of discussion about food stamps as a ‘subsidy’ to low-wage employers here and here, campaigns for a $15 minimum wage, and now supposedly the Democrats are going to make a $12 minimum wage a campaign issue. A lot of people who should know better are saying some very dumb things. Here’s a short reality check.

The wedge. FICA is a big tax on low-wage employers and workers. FICA is 15.3% (6.2% Social Security, 1.45% Medicare, same 7.65% employer contribution). So there’s an effective income tax of 15.3% on the minimum wage worker. Employer pays $10, $1.53 goes to the government and the worker gets $8.47. That’s a big ‘wedge’ between what the employer pays and what the employee receives. As micro-economics 101 will tell you, that tax burden fall partly on the worker and partly on the employer, and there is a deadweight loss, since there are workers who would have been happy to work for $10 who can’t work for $8.47 and keep looking, join the casual/gray economy, or drop out of the labor force.

Food stamps. If a worker gets a subsidy like food stamps, or any benefit not linked to labor, the entire subsidy accrues to the recipient, and no meaningful benefit accrues to the employer. If we’re looking at first-order effects, Walmart doesn’t get to pay a lower wage, doesn’t get more applicants, when employees get food stamps. In fact, if you take away food stamps etc., Walmart may be better off. They’ll get better employees working longer hours without worrying about losing benefits if they make too much money. You can’t call it an employer subsidy if taking it away doesn’t hurt the employer in any way. (Now, benefits do something to the overall economy that helps Walmart, they sell more to people with food stamps. But it sets my teeth on edge when people frame it as some kind of subsidy.)

EITC is a subsidy to low-wage employers. The employer pays $10/hour, instead of getting $8.47, the employee gets a tax refund that brings it up to $8.75 or more. I don’t know the details of how the EITC is calculated, but if you have no kids the maximum benefit is about $500, with kids it goes up to over $3,000. It’s not much, but it takes a bite out of the ‘wedge’, benefits both the worker and the employer, and encourages people to work. If you don’t do that, sitting at home is often no worse than a low-wage job, after FICA, loss of means-tested benefits, paying for work-related expenses, transportation, child care.

What would a $12 minimum wage do to labor supply and demand? The labor market is, well, a market. You raise the price of something, the quantity demanded decreases. You raise the minimum wage enough, there are fewer fast food joints, fewer jobs, more self-serve checkouts and hamburger-flipping robots.

Conclusions:

  • $12 seems higher than market-clearing unskilled entry level in NYC, seems downright high in Alabama and Las Vegas. $15 is higher than a pretty large fraction of jobs, including some teachers and skilled factory workers in the South, and higher than the state median wage in Arkansas and Mississippi.
  • The Federal government can’t and shouldn’t set an appropriate entry-level wage for NYC, Alabama, Hawaii, and Alaska. Unlike Obamacare, that actually is central planning, and either we have a market economy or we don’t. A minimum wage in my mind, should be an absolute floor, wages below which are a signal of some market failure, an abusive employer, or some real problem in the workplace that needs to be addressed with more education or better management.
  • Poor people pay pretty high taxes that are a strong disincentive to work. Romney can talk about the 47% who “don’t pay income tax”, but he completely ignores FICA. On his “capital gains” income, Romney only pays 15%, and that only on the portion he doesn’t shelter in his massive IRA. Jeff Bezos, god bless him, can create a $100b fortune without ever paying income tax if he doesn’t take a distribution from Amazon or a capital gain on his stock. (And there’s no corporate income tax if Amazon runs at break-even, and some people want to end the estate tax, so his heirs could get $100b without anyone ever paying income tax.) The poor person pays 15.3% on the first dollar of earnings1. And work-related costs like transportation, work clothing, child care, are very high proportional to his/her income, sales taxes are even more regressive.
  • Walmart gets some help from the EITC, but it only partly neutralizes FICA, loss of benefits and other disincentives to labor.
  • Walmart likes food stamps, because it helps poor people buy at Walmart, not because it helps hiring.
  • Walmart likes a high minimum wage, because it hurts their competition more than it hurts them as the most efficient place with the most productive workers.
  • Raise the minimum wage, you get more Walmarts and Walgreens with self-checkout and burger-flipping machines, fewer Greek diners, bodegas and mom-and-pop stores. You also get more people working under the table, on Craigslist, in the Home Depot parking lot, collecting recyclables.
  • Yo-yos who say everyone should ‘have skin in the game’ and pay income taxes are 1) willfully ignorant about what taxes poor people pay, 2) demonstrating they are pro-tax increases as long as they are paid by poor people and 3) willing to push people out of the labor market and into the gray economy because they care so much about ‘skin in the game.’ The tax code is moderately progressive, but not extremely so. Some people want to look at one part of the tax picture and get worked up, but you have to look at the whole picture. And then people get hung up on procedural concerns about whether aid to poor people should be tax relief, cash, whether they should be allowed to eat steak and seafood, etc. Meanwhile, the taxes on poor people are quite high and raise a significant barrier to work.
  • The problem is not subsidies for hiring people, the problem is not subsidizing them enough to overcome the disincentives for working and for hiring people. And a higher minimum wage isn’t going to make it better.


1Who pays the 15.3%? Maybe workers can’t be hired for less than some take-home pay, and the employer pays the whole payroll tax. Maybe employers only hire for a certain all-in cost, cut wages to reflect their portion of the tax, and the worker pays the whole thing. But the outcome is the same, whether the employer sends the dollars to the IRS, or the employee sends the dollars to the IRS. So, even though it isn’t reflected that way in estimates of taxes paid by the bottom 20%, the effect is the same as if low wage workers wrote a check for the 15.3% to the IRS.