It should come as no surprise that one of the first acts of the 110th Congress will be legislation to raise the minimum wage. A bit more surprising is the endorsement by President Bush, who recently announced that a minimum wage increase was a policy on which he and the incoming Democratic congress could "work together."
Unfortunately, his cooperation comes at a cost. To the president, "working together" on a bill to increase the $5.15 federal minimum wage to $7.25 over two years means … guess what? … more tax cuts.
There's every reason to keep this minimum wage bill clean and little rationale for tax cuts.
Bush's stated motivation for accompanying cuts is to avoid "punishing" small businesses, by offsetting the increase in their labor costs with "targeted tax and regulatory relief." Since all low-wage firms face the same increase (and thus no one firm is at a competitive disadvantage) and Congress has surpassed the nine-year Reagan-era record for failing to raise the minimum wage, "punish" seems like an awfully strong word. Nevertheless, recent history suggests that any such offset will cost much more than the wage increase and will not be effectively targeted at low-wage employers. Moreover, the tax cuts would be permanent, even though the value of the minimum wage hike is eventually eroded by inflation.
The increase to $7.25 by 2009 is a historically small one. Research by Liana Fox of the Economic Policy Institute suggests that it will directly lift the wages of about four percent of the workforce, compared to more than twice that share for the last federal increase in 1996-97.
Speaking of the last increase -- from $4.25 to $5.15 -- it passed with some tax cuts served up by the Gingrich Congress that Clinton had to swallow. More on these in a moment, but legislators and the public should recognize that this pairing of tax cuts and minimum wage increases is not the norm: neither the 1990 increase under Bush I nor any others were passed with tax cuts. Raising the minimum wage is a very simple piece of work; most bills are literally a few paragraphs long. And the increase has virtually no budgetary impact.
Tax cuts, on the other hand, are costly, and history shows they are not likely to be well-targeted. In 1996, there were tax cuts for small business equipment investments and pension plans, but there were also tax credits for R&D at big corporations and for adopting parents, and a new IRA for homemakers.
In 2000, the GOP leadership added these bright ideas to a proposed minimum wage increase: a reduction in the estate tax, increased write-offs for business meals and for business investments, tax breaks for timber companies and for tax-exempt bonds, a higher self-employment health deduction, and expanded enterprise zones. Whatever their merits, neither the legislated tax cuts in 1996 nor the proposed tax cuts in 2000 were "targeted offsets" for businesses paying the minimum wage.
What's more, such tax cuts are usually forever, while federal minimum wage increases die a slow death. Since the federal minimum is not indexed to inflation, its value erodes over time -- the real value of the current minimum is at a 50-year low. Five to ten years after the increase, almost all of its benefits will have eroded, yet the tax cuts will be yielding dividends for as long as they stand (those from 1996 are still in place, for instance). Our analysis of the GOP proposal in 2000 found that the value of the proposed tax cuts surpassed that of the wage increase by 11 to 1 ($123 billion vs. $11.2 billion over ten years).
And by the way, if raising the minimum wage has to be offset by small business tax cuts, shouldn't its real decline be offset by tax increases? Democrats in the new Congress will insist that any new tax cuts be paid for. Where's the revenue coming from?
No matter. Neither symmetry nor fiscal prudence are in play here. And we suppose you could write this off as the predictable horse-trading we're likely to see over the next few years. No one should be fooled, however, that a new bundle of tax cuts is either warranted or related to the much-needed minimum wage increase. So, Mr. President, let's keep it clean.
Jared Bernstein is a senior economist at the Economic Policy Institute. Lawrence Mishel is EPI's president.
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