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The minimum wage – America’s next tax increase

March 4, 2013

The administration wants to increase the minimum wage to $9.00 an hour, an increase of 25%, and index it to inflation. Earth to America…that 25% raise won’t push any one into the middle class for longer than a year, in terms of real buying power.

In the past twenty years, the official poverty level has risen from $14,228 for a family of four to $23,364 in 2012, according to the U.S. Census Bureau[1]. Over the same period, the minimum wage has risen from $4.25 to $7.25 an hour. On September 13, 2011, the New York Times ran a headlined story stating the number of people living in poverty had hit the highest number in 52 years. [2]  Apparently the minimum wage isn’t keeping people out of poverty.

What it does do is expand the amount of available tax revenue. This amounts to a sneaky way of increasing the taxes paid by both workers and businesses. It’s a lot more politically acceptable than having everyone pay a percentage of their income, even if they don’t have much of an income. It surely isn’t as hard as implementing policies to increase hiring, which used to be the typical way to increase tax revenue, or reducing the amount of money that flows into Washington, which is apparently not a strategy at all anymore.

The minimum wage increase is what I call a “binky-benefit”, i.e. something Washington benevolently bestows upon people to distract them, so they won’t notice that someone is really taking something away from them. It’s exactly like giving a child a binky instead of a bottle. You take something of substance away and substitute something that looks like the same thing, in the hope the kid won’t cry so much.

As of today, the government can’t just walk into a business or home and demand twenty-five per cent more money. It can collect taxes on any increased wages paid by businesses and employees. The number and cost of government programs continues to rise every year. The money has to come from somewhere, or the pyramid collapses. One way the government has handled this in the past is the minimum wage increase, because it can be presented as helping low-income workers. In reality, there is somewhat of an ulterior motive in that strategy.

Historically, an increase in the minimum wage also increases wages for most workers, particularly those employed on Federal projects. Whatever the increase is, however it happens, employers have to collect taxes on it, and they have to send the taxes to Washington.

The increase in the minimum wage will inevitably raise prices. Business survival is about selling prices being greater than production costs, and the cost of labor is typically the largest ongoing cost for businesses. When costs increase and can’t be mitigated by short term adjustments, prices go up permanently to compensate, simply as a matter of survival.

Living comfortably is about whether you make more than is necessary to survive at a minimum level. The minimum wage could be $100.00 an hour and it would still be the minimum wage if the cost of living is $125/hr.  Raising the minimum wage will do absolutely no good at all, if we can’t stop the increase in costs. Indexing the wage to inflation will automatically increase inflation.

Yes, people will spend more temporarily, and they will initially buy more non-essential items. At some point, when the price of necessities increases too much, all that artificial spending pulls back again to a survival level. Most of the costs are driven by a majority belief that more and bigger government will solve our problems. History shows that is not the answer to living a better life. It’s time to throw the binky away, put on big-boy pants and work our way out of this mess.  

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