A Tax to Discourage Paying Low Wages

Taxpayers Subsize Low Wages

Companies that pay low wages may be indirectly forcing taxpayers to subsidize the practice.

Fast-food workers who don’t make enough to take care of their needs are compelled to draw on public assistance. McDonald's even has a “McResource” phone line that helps employees and their families enroll in various state and local assistance programs.

A report was quoted on the Bloomberg Businessweek website:

Two studies released today make some different calculations to determine the total cost to American taxpayers of a large, low-wage workforce.

It comes to an average of $7 billion a year. That’s the amount of annual public assistance families of fast-food workers received between 2007 and 2011, according to a new report written by economist Sylvia Allegretto and others, sponsored by the University of California at Berkeley’s Labor Center and the University of Illinois at Urbana-Champaign, and funded by Fast Food Forward, the group that helped organize the summer’s labor strikes.

The authors used publicly available data.

A group in Berkeley estimated that the total annual cost of public subsidies to low-wage employers is approximately $153 billion. To put that number in context, the total proposed 2015-2016 California state budget is $165 billion. So American taxpayers are essentially running a corporate welfare program almost the size of the California state budget to take care of workers and their families who struggle with low-wage employment.

Companies are motivated to pay low wages because they can get away with it and because lower wages mean lower costs. So, how about a cost penalty for the practice of paying low wages?

When someone gets charity care at a hospital emergency room, applies for welfare , gets food stamps or receives any other form of public assistance, the dispensing public agency should take note of where the person is employed and find out what they are paid.

If it appears that their wage is too low, or they are not working enough hours, their employer gets assessed a fine.

The offending companies might thus be motivated to increase wages and hours so that their employees demand less public assistance. Perhaps the fine could depend on the number of low-wage employees employed by each company.

If the amount of public assistance used by a given company’s employees gets below some level, then the fine would be eliminated for that company.

This scheme would put incentive in the right place, as long as company management sees the fine as a cost of their policy of low wages and inadequate hours.

Limit Coverage Area

The scheme should be based on a fairly large geographic area. Having this tax only on a small town might simply move low-wage businesses to other nearby towns.

The area covered should be at least the size of a county.

A Symbolic Rather Than a Punitive Fine

Another way to avoid driving businesses away would be to limit the amount of the fine to be enough of an annoyance and a drag on profits to get management attention, without making the business unprofitable. It is not necessary to cover the entire cost of the public assistance used.

Motivation might also be enhanced by making public the amount of fine charged to each offending company, along with a summary of that company’s wage and hours practices.

A Simpler Scheme

The proposed scheme should not be too complicated and expensive to run. We don’t want a big bureaucratic burden.

Here’s a scaled-down simple version of the scheme:

Develop a list of offending companies. If a company has more than so many employees being paid less than some minimum wage, or working less than some minimum number of hours, the company gets on the low-wage list.

Public assistance agencies simply note the applicant social security number. This can be used to determine their employer by looking at withholding records. It is not necessary to collect any wage or hours information pertaining to an individual applicant.

This collection process produces the total public assistance paid to each company on the low-wage list. Dividing each company total by the overall total yields an index which is used to calculate the tax, in proportion to each company's impact on public assistance.

Again, the tax amount does not have to cover the total public assistance. The amount can be much less, as long as company management sees the tax as an annoying cost which can be reduced or eliminated by improving employee wages and hours.

Managing the Motivation

A company might try to discourage use of public assistance by their employees. It could fire anyone who uses it, but that might result in not being able to retain enough low-wage employees to operate the business.

It could offer internal benefits, which might cost less than the tax. It’s important for government to set the tax amount high enough to make wages and hours the most attractive management option for reducing the annoying tax.

There are probably clever ways to dodge the tax. The idea of the scheme is not to punish low-wage companies or even collect the cost of the public assistance their low-wage employees are compelled to seek.

The purpose is to discourage the practice of abusing employees by not allowing them to earn enough to take care of themselves.

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