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The Minimum Wage Is a Tax Increase

The argument in favor of raising the minimum wage is that it amounts to a salary increase for the working poor. “Give ’em a raise!” President Obama is fond of shouting when pushing for such an increase, with the breezy confidence of someone who has never had to meet a payroll.

Higher wages for the working poor = more money to spend. Simple, right?

“Not so fast,” counter people who actually know how the economy works. “Money doesn’t just flutter down from the clouds at the command of benevolent politicians. It has to come from somewhere.

The standard liberal counter to this point is that evil fatcat businessmen will pay the increased wages from their obscene profits, but this denies the reality of tight profit margins in most business sectors, especially those most likely to employ minimum-wage labor. One of the most important errors in public thinking conservatives should be working to correct is the common belief that corporate profit margins are about four times as high as they really are. That’s a major reason people are willing to believe minimum wage hikes, and other mandates on labor, can be funded by pennies from heaven.

The more realistic response to minimum-wage increases involves some combination of making do with less labor – cutting hours, firing people – or passing the cost increase along to consumers. Rarely do we find such a clear-cut example of the latter as the hefty price increase at Chipotle restaurants in San Francisco. As the Chicago Tribune reported, the company was quite direct about raising its prices to cover the cost of local minimum-wage hikes, above and beyond the general price increase imposed on numerous markets to account for the rising cost of food supplies, particularly beef.

Well, paying 10 percent more for meals is a small price for everyone to pay if the working poor get a better wage, isn’t it?

No, not at all. For one thing, even if it did work that way, we’d be talking about quietly bleeding money away from middle- and upper-income people who have done nothing wrong, and giving it to others through the highly inefficient middleman of stealth redistribution programs. At least blatant redistribution programs can be monitored, and it can be argued the voters accept them with eyes wide open. The Left’s conviction that voters would not accept the level of redistribution they have in mind is the reason so much of their agenda is hidden with pass-through taxes and other accounting tricks.

At any rate, the cost of minimum-wage increases is not painlessly absorbed by well-to-do individuals who can afford to pay more, even if we table the moral question of whether forcing them to pay more is acceptable. Forbes describes a study which accepted the inaccurate premise that minimum-wage hikes would involve no job losses, modeled the distribution of increased consumer costs across the economy, and found “the minimum wage increase acts like a sales tax in its effect on consumer prices, a tax that is even more regressive than a typical state sales tax.”

The minimum wage is a tax, not a benefit, and it’s regressive because it hits low-income families at least as hard as it does higher-income consumers. “Far more poor families suffered reductions in resources than those who gained,” the study concluded. “As many rich families gained as poor families. These income transfer properties of the minimum wage document its considerable inefficiency as an antipoverty policy.”

There are many reasons for the regressive nature of the way increased labor costs hit the consumer base, a prominent one being the tendency of wealthier individuals to shop at places that already pay above the minimum wage. Also, many of the beneficiaries of minimum-wage hikes are not poor – for example, the children of a well-off family working at their first jobs.

There is a larger issue to consider here: the difference between free and managed economies. The proponents of a planned economy think the government can improve citizens’ standard of living – if not generally, then at least for the lower income brackets – by mandating prices and income. So what if everything costs more than it should, provided everyone is getting paid more than greedy, exploitative employers would otherwise pay them?

It’s been a long, long time since we saw anything resembling the opposite state of affairs, where the market is permitted to dictate both prices and pay scales. It would be interesting, if impractical, to conduct an experiment in how that would actually work, rather than accepting the thoughtless assurances of the Big Government Left that it would be awful, and everyone would starve.

One of the problems with central-planning policies that inflate both cost and income levels is that it gives the government a lot more cream to skim off the top. (Of course, Big Government voluptuaries don’t think that’s a “problem” at all.) Everything costs more, we all get paid more, and there’s more room for government taxation and regulation. If pennies, dimes, and nickels were still meaningful units of currency, people would notice increases in the tax and regulatory burden much more. It would be much harder to slip hidden redistribution systems into every transaction, from paychecks to purchases.

For those genuinely concerned about the welfare of the downtrodden, wouldn’t a simpler, purer system of free-market prices also make it easier to provide essential food and shelter to them? The true minimum wage is always zero: the amount earned by people who don’t have jobs. Reducing the gap between zero and the average wages of working people would both create more jobs, and make it easier to provide a safety net for those who cannot find one.

In other words, a simpler economy with a lighter burden of government, and less static corrupting the pure data of commerce, allocates resources more efficiently. The advocates of statism can’t have that, now can they? It would give them fewer opportunities to boast of how generous they are with other peoples’ money. Voters might become aware that one of the big reasons statists are always declaring they want people to be paid more is because that means more money for the State in taxes, and less freedom for the people to invest their capital, or indulge their desires, as they see fit.

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