The former is a meaningful and impactful solution; the latter is a largely symbolic gesture that will do the economy more harm than good.
First off, the administration’s goal of raising the minimum wage from $7.25 to $10.10 is meaningless to most Americans because very few (about one in 20 hourly workers) actually earn it. And, as government data shows, most of those earners are neither poor nor support a family. About 80 percent are above, not below, the poverty line, and nearly half are teens and young adults, a third of which live with their parents.
Secondly, minimum-wage hikes do nothing to stimulate job creation, particularly among small businesses. On the contrary, employers are more likely to reduce hours, freeze hiring or lay off workers and shift more duties to remaining employees.
“It’s simple math: If the cost of hiring goes up, hiring goes down,” National Retail Federation President Matthew Shay said.
Eventually, companies simply would pass along the increased costs to consumers in the form of price hikes, fueling inflation and eroding the value of workers’ wages.
The natural laws of economics have proved time and again that the key to boosting employee earnings is through increased productivity, not artificial wage manipulations.
If the president were serious about trying to “speed up growth, strengthen the middle class and build new ladders of opportunity into the middle class,” as he said during his State of the Union address, he could do something to substantially increase the nation’s productivity – cut the corporate tax rate.
The U.S. corporate tax rate, the highest in the world for a developed nation, discourages job and wage growth in two ways. It encourages U.S. companies to expand overseas, which robs Americans of an employment opportunity. And it robs companies of incentives to repatriating their overseas profits, which in turn robs the government of a revenue source and stunts the domestic investment of foreign profits.
“I really think the issue of companies sitting on cash is that a lot of their sales are occurring overseas. Their cash is essentially trapped,” said Wells Fargo economist Mark Vitner, who spoke recently at Augusta’s University of Georgia Economic Outlook luncheon. “To bring it back to the U.S. doesn’t make a lot of sense because we have the highest corporate tax rates in the world.”
Apple, for example, paid only 8 percent of its worldwide profits in U.S. corporate income taxes by piling up profits in operations overseas.
No wonder that, for all its compliance and collection costs, the corporate income tax produces very little revenue (1.8 percent of gross domestic product in 2013).
America’s statutory corporate tax rate, 40 percent, is 14 points above the average for Organisation for Economic Co-operation and Development-member countries. Even with loopholes and generous deductions, the rate still is higher than most other nations, including Canada (26 percent), China (25 percent) and the United Kingdom (23 percent).
We agree with the conclusion of the National Bureau of Economic Research’s December 2013 report, “Simulating the Elimination of the U.S. Corporate Income Tax,” which advocates cutting the corporate tax to 9 percent with no loopholes.
Such cuts can “produce rapid and dramatic increases in U.S. domestic investment, output, real wages and national saving.”
The question comes down to this: What will produce more long-term economic benefits for the American worker – putting more money in the hands of the nation’s relatively few lowest-paid employees, or toward businesses that can develop new products, expand production and create jobs?
Unfortunately, based on the Democrats’ penchant for using government policy as a vote-buying tool, we have a pretty good idea which agenda the president will push.