Saturday, July 29, 2006

Tying the Minimum Wage to the Death Tax

As noted by blogger Ric James in a post at Hoodathunk?, the United States House of Representatives recently approved a bill that would increase the federal minimum wage with a provision that makes permanent the soon-to-sunset reductions in the so-called "death tax." The "death tax" is the name given to the tax imposed on inheritances received from multi-million dollar estates, and its current provisions provide for the gradual reduction of estate taxes to a rate of 45 percent and a complete repeal of the estate tax for the year 2010. Unless the current sunset provisions of these tax cuts are made permanent, as they were with the bill just passed by the House of Representatives, the estate tax would revert to its previous level of 55 percent in the year 2011.

Other things being equal, there will be no tax on the estates of people who die in the year 2010, giving potential heirs an incentive to keep their potential benefactors alive until that time. However, once the year 2010 arrives, there will be an incentive for potential heirs to hasten the death of the their potential benefactors before the year 2011. Of course, there are other factors at work. To wit, if the estate tax does not apply to inheritance, a capital gains tax might kick in.

Until now, the minimum wage had nothing to do with the estate tax, but the people who favor a permanent repeal of the estate tax have effectively married the fate of the minimum wage to the fate of the estate tax. There's a pretty good chance that the bill just passed by the House of Representatives won't go anywhere, but it's also pretty clear that any attempt to raise the minimum wage will also not be going anywhere unless and until the sunset provisions of the estate tax have been resolved. In other words, the Republicans in congress have effectively compromised the strategy of Democrats in congress to make the minimum wage a wedge issue in the November 2006 elections.

Truth be told, if your objective is to help the working poor, the federal minimum wage law is a red herring. To wit, proponents of raising the minimum wage will often cite the fact that someone working full time at minimum wage would be living in poverty, ignoring the facts that (1) very few people living in poverty actually earn at or below the minimum wage and (2) very few minimum wage earners actually live in poverty. Meanwhile, rather than pointing out these facts, opponents of raising the minimum wage will usually argue that the minimum wage causes unemployment, ignoring the empirical evidence which indicates that the minimum wage is not the big job killer that most economists believe it to be.

As I have pointed out on numerous occassions, an expansion of the Earned Income Tax Credit (EITC) would be a much more effective and equitable way of helping the working poor than raising the minimum wage. Indeed, while there is little empirical evidence to indicate that the minimum wage is actually a big job killer, all of this evidence is based on modest increases in the minimum wage that displace unskilled workers who have the most trouble finding low wage jobs when the economy goes south in favor of middle class teenagers and spouses. Moreover, while the evidence regarding the effectiveness of the EITC over the minimum wage as a poverty fighting measure is incontrovertible, many people will still argue that "we need both."

Whatever might be needed to help the working poor, an increase in the federal minimum wage is certainly not needed, as it does nothing to help the working poor. Moreover, as demonstrated by the recent bill passed by the House of Representatives, any proposal by the Democrats in congress to increase the federal minimum wage will almost certainly be poisoned by an amendment proposed by one of the Republicans in congress. Right now, it's the death tax; a couple of weeks ago, it was an anti-abortion measure. So, if you're going to have to compromise, why not ask for something that really helps the working poor?


Blogger Harold C. Hutchison said...

Actually, I'd like to see the GOP ty the minimum wage hike to a huge tax-cut bill that not only eliminates the inheritance and gift taxes, but which takes out the top income backet, makes the rate reductions permanent, and which eliminates the corporate income tax (which doesn't hurt Microsoft, Wal-Mart, or any other big coporation one iota - they just pass the cost on to their customers, including the poor).

9:24 AM, August 01, 2006  

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