Tuesday, January 16, 2007

Minimum wage Vs. A Negative Income tax rate and Obama for President

It now seems all but certain that the minimum wage in the United States and in the state of Illinois will be raised which will be bad for the economy in the long run. There are a couple of reasons that a minimum wage hike is bad for the economy and will not do much if anything to help the poor in the United States. First it does nothing to address the main causes of poverty in the United States which are problems with the educational system and cultural failings. Any increase in the minimum wage that was large enough to left the people on it out of poverty would also cause a massive increase in the unemployment rate in the United States, similar to what you see in more socialized European countries that tend to have higher unemployment rates, like France rate of 9.9% or Germany's of 11.9%, particularly among low skilled and young workers. Even the proposed increase of the US minimum wage to $7.25 will raise the unemployment rate in the United States and in the long run encourage companies that can to replace low skill workers with automation when ever possible. The reason for this is that by raising the price of labor to higher than its economic value it price compared to capital, ie automation, is changed and if it becomes relatively more expensive then capital then companies will replace low skilled labor with capital when they can. If Illinois raised it minimum wage to even higher than the national one, then we lose jobs as companies that are reliant on low skilled labor will relocate out of Illinois if they can and we will be less competitive when it comes to attracting new low skilled jobs.

The reason that a minimum wage hike attracts all the support that it does despite it problems is that for the vast majority of people it will have no direct effect on their day to day lives. The only effect that it will have is indirect from higher prices and possible inflationary consequences. Many people in the general public are by in large unaware of many of the basic economic laws, thou they themselves follow them each day. Along with that many Unions support a minimum wage increase because some of the contracts that they sign have pay scales that are based off the minimum wage rate and an increase in the minimum wage raises their member’s salaries. It also easy to scape goat the opponents of the minimum wage by scape gloating them as being greedy corporation that are to cheap to pay there employees a "living wage", which ignores the fact that the minimum wage hike has the least effect on corporation that can absorb the cost or replace low skilled workers with automation, and has the most effect on small businesses. Along with that the group that it has the largest negative effects on young low skilled minority workers who will see there unemployment rates rise the most.

Expanding the Earn Income Tax rate into a full scale negative income tax is a better way to help the working poor. This way they would pay nothing in taxes and would see there real income increase from the negative income tax that would be paid to them up until the point they are above the poverty line at which point the negative income tax would cut off. If it was structured so that the payment they receive doesn’t decline by one dollar for each additional dollar that they earn, instead declining by 50 cents, it would also encourage them to work more, since the more that they worked, the more their real income would increase. It would also have a smaller impact on the unemployment rate and could actually lower it.

Today Barack Obama announced that he was forming an exploratory committee to run for President, for the moment ignoring my ideological disagreements with him, does any one real thing that he is ready to lead the country after serving less than one term in the United States Senate and only a few years in the Illinois Senate?

1 comment:

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