$15 Minimum Wage – Soaking the Rich

Taxpayers are not like sheep, docilely waiting to be shorn.

$15 Minimum Wage – Soaking the Rich

By: George Noga – March 14, 2021

With Democrats back in power, we revisit two of their leitmotifs beginning with the minimum wage, which they champion despite opposition from economists of all political persuasions. Markets determine wages, not governments and $15 is vastly different in NY vs. WV. The biggest problems with the minimum wage are:

1. It disproportionately puts the poor, minorities, young and low skilled out of work. It is economic strychnine; whenever the minimum rises, businesses are incentivized to relocate and/or automate. When the price of anything goes up, we get less of it.

2. Fewer than 1% of workers are affected. Of those affected, most earn minimum wage for six months or less. It impacts virtually no heads of households or full time workers. The few workers helped are hugely outnumbered by those who lose their jobs.

3. Most minimum wage workers are not poor. The average household income for someone earning the minimum wage is nearly $60,000. Spouses and teens living at home benefit – like the kid who delivers your pizza to buy gas for his SUV.

4. The poor need jobs, not a higher minimum wage. Most people in poverty don’t work and raising the minimum wage makes it harder for them to get a job. Those receiving unemployment or welfare do not benefit. The real minimum wage always is zero.

5. The earned income tax credit (EITC) is cut. Any benefit from a higher minimum wage is substantially negated by a lower EITC and is a disincentive to working.

Labor unions support minimum wage mostly because it prices the poor and minorities out of the labor market, reducing competition for lower paying jobs. Support also comes from liberal virtue signalers inflating their self esteem. As with other feel-good bromides, it enables soft-headed liberals to flaunt their pristine intentions.

Why it is Impossible to Soak the Rich (except for one way)

Following are the main reasons it is impossible to soak the rich. As a former CPA tax professional, this is a subject about which I have considerable first hand knowledge. Please see our 3/3/19 post on our website (www.mllg.us) for more in-depth analysis.

1. Tax revenue is a constant 18% of GDP (20% in good times, 16% in bad times). This has been valid for the past 75 years and is explained by Hauser’s Law; see infra. Whether tax rates are 92% or 28%, the IRS collects the same 18% of GDP in taxes.

2. Elasticity of taxable income: Analyzing returns before and after tax increases reveals that high income taxpayers paid less at the higher rate than at the earlier lower rate. Moreover, the income of the truly rich is mostly capital gains – not ordinary income.

3. The rich are not the same people. High income taxpayers are mostly different people each year. If someone sells a family business, that taxpayer is “rich” for that one year only. It is impossible to soak the rich if they change from year to year.

4. There is no way to identify the rich. Government has data only for income, a poor surrogate for wealth. You can’t soak the rich if you don’t know who they are.

5. There aren’t enough rich. There are too few to make soaking them worthwhile. You can’t soak them by taxing businesses; they simply pass the cost on as price increases.

6. The rich will take countermeasures: Most of the wealthy got that way for good reasons; i.e. they are bright, resourceful, hard working and definitely not docile. They will adjust (and quickly) to any measures designed to soak them.

Hauser’s Law works because taxpayers are not sheep docilely waiting to be shorn. When rates are raised, they work, save and invest less; barter; retire early; hide, defer and underreport income; convert ordinary to capital gains and defer gains until there are offsetting losses. They employ tax shelters; shift income to lower bracket family members; seek tax free income; shift income to corporations; establish pension plans; exploit ambiguities and loopholes; lobby aggressively for tax breaks; move, even to outside the US; enter the occult economy; use top tax professionals and much more.

There is one (and perhaps only one) way to soak the rich, i.e. with lower tax rates. Hauser’s Law also works in reverse; when rates go down the rich are disincentivized to further lower their taxes. When rates drop, the rich pay a much higher share of taxes than before; it works every time. Progressives won’t do it because they don’t really want to soak the rich; they only want to appear to be soaking the rich.

Next on March 21st, we begin our series: Laboratories of Democracy.

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