Economists Emmanuel Saez and Gabriel Zucman note that the federal minimum wage is “at an all-time low relative to living standards.” Inflation has steadily gnawed away its purchasing power since it was last raised in 2009, growing to $7.25 an hour from $5.15. A worker earning the federal minimum today earns just 19 percent of the average national per-adult income of roughly $75,000 per year — a measure Saez and Zucman say best reflects standards of living over time.
If directly raising the federal minimum is off the table, as political reality in the Senate would suggest, Saez and Zucman say lawmakers could instead create a fully refundable tax credit for low-wage workers that would be financed through a new payroll tax. Here’s a simplified explanation of how it would work.
First, lawmakers would define what Saez and Zucman call an “aspirational” living wage — the number they would set the federal minimum to if they could. Employers paying less than the aspirational wage would face a new payroll tax; it would be equivalent to the difference between the aspirational wage and what they actually pay employees — the wage gap.
The money generated by that tax would be routed toward employee paychecks in the form of a fully refundable tax credit.
Say the aspirational wage is $12 an hour, and a company pays one of its workers $10 an hour. The company would face a new payroll tax equivalent to the difference. That $2-per-hour payroll tax would, in turn, fund a comparable refundable tax credit for the employee.
In practice, Saez and Zucman say they would not fill in the entire wage gap from the start. They would allow for the size of the credit/payroll tax to increase gradually year by year. For instance, if lawmakers decide the aspirational wage is $15 an hour, they could target a wage increase of 20 percent of the gap in the first year, 40 percent in the second, and so on, letting wages ramp up gradually.
Molly Reynolds, a senior fellow in the governance studies program at the Brookings Institution, noted that Congress has a long history of enacting social policy via the tax code and the reconciliation process. “So, in that sense, using the tax code as a side door when a more direct route would be through the front door is not unusual,” she said.
She added that “if Democrats were to pursue a minimum-wage increase via the tax code, they would need to figure out how it would fit in with other provisions they might want to pursue in a subsequent reconciliation bill.”
Refundable tax credits are typically claimed at the end of the tax year. This is less than ideal from the worker’s standpoint, as they would have to wait until tax filing time to make up their total annual wage gap.
But Saez and Zucman write that employers could be allowed to administer the credit to employees in real time, paycheck to paycheck. The advanced earned-income tax credit, which was phased out in 2010, worked this way.
“The policy increases take-home pay of low wage workers and makes their employers pay for it, just like a minimum-wage increase,” Saez and Zucman write. That makes it substantively different than other minimum wage workarounds proposed by lawmakers.
Democrats, for instance, have considered imposing tax penalties on companies paying less than $15 an hour, with a carveout for small businesses. But economists have noted that most minimum wage workers are employed by small businesses, meaning relatively few workers would be affected by such a change.
Republican Sen. Josh Hawley of Missouri, meanwhile, has proposed taxpayer-funded tax credits for some low-wage workers. But that proposal could create odd incentives — corporations could choose to cut employee wages and let the federal government pay for the resulting wage gap, for instance. And it suffers from the same targeting problems as the Democrats’ proposal.
One drawback of Saez and Zucman’s proposal is that it is considerably more complicated than a straightforward minimum wage increase, and it imposes more administrative burdens on employers.
“A direct minimum wage increase would be even simpler and hence preferable in principle,” they write. But, “this political moment requires designing policy through taxes and transfers” that are not subject to the Senate filibuster.
At this point, it is unclear whether such a policy would be able to get 51 votes in the current Senate. Saez and Zucman write that they simply want to demonstrate that it is possible.
“Our point is that minimum wage policy can be translated into tax policy with little loss,” they conclude. “Therefore, the US Senate cannot hide behind reconciliation rules to block it.”