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The federal minimum wage hike didn’t get through the Senate “Byrd bath” process in the first draft budget of this year because it’s insufficiently budget-related, but what if it’s repackaged as a tax instead? That is the question raised by economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley in a recent article on a minimum wage tax.
A tax and credit combination designed to mimic a direct increase in the minimum wage could meet the budget’s procedural requirements as part of the voting process.
It would likely face the same political headwinds that could have the same fatal outcome for the tax proposal as the Byrd rule for the direct increase. What is noteworthy about the proposal, however, is the proposal to use the tax code as a means of voting into force items that would otherwise not make it through the process.
The enlivening idea is that the budgetary impact requirements could be more or less eliminated rather than limiting which directives are put in place as part of the budgetary process.
“Taxes are powerful and versatile. This political moment requires the shaping of politics through taxes and transfers, ”conclude Saez and Zucman.
You are right about the variety of tax laws, as both your proposal and the variety of provisions in Title 26 show. Congress doesn’t just limit itself to using the tax code just to collect the revenue necessary to keep the federal government going.
However, there are administrative costs to inserting programs that are not about including the revenue in tax laws and the proposal addresses that reality without considering the additional administrative burden that would be placed on the IRS.
The proposal provides for a refundable tax credit for employees and a wage tax for their employers, both set at a fraction of the pay gap or the difference between the target wage and the actual wage.
Congress would set the target wage level. The employer would pay the new tax along with the existing wage tax. The tax / credit rate should likely increase over time.
Employees would likely get their credit when filing their tax returns, but other arrangements could be made for more regular distribution. By imitating a tax law increase in the minimum wage, the proposal is intended to remind the senators of the plasticity of the budget rules.
“A direct increase in the minimum wage would be even easier and therefore preferable in principle,” wrote Saez and Zucman. But since the direct approach is definitely against budget rules, would an indirect approach have a better shot?
Bypassing the Byrd rule
The budget process established in the Congressional Budget Act of 1974 prohibits “foreign affairs” in reconciliation legislation. In order for foreign material to be excluded from a household bill, a senator must set rules of procedure against it.
With respect to the proposed minimum wage, external items are those that do not cause a change in expenses or income or changes in the conditions under which expenses are incurred or income must be collected. Cause changes in expenses or income that are only related to the non-budgetary components of the provision; and increase net expenses or decrease income in fiscal years after the fiscal years covered by the reconciliation.
Saez and Zucman suggest that their policies would increase tax revenues and expenditures, which would bring it over the hurdle of effecting a change in expenditures or revenues in 2 USC Section 644 (b) (1) (A) “. Since employer tax and employee credit are mutually zero, the total income or expense should not change. The proposal calls for taxes and credits to be levied and distributed in basically equal amounts or in new taxes of $ 333 billion and $ 333 billion in new expenses.
Economics professors Emmanuel Saez (L) and Gabriel Zucman (R) stand for a photo about the university … [+]
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A parenthesis in Section 644 (b) (1) (A) explains that “any provision in which expenditure decreases or precisely offsets income, increases expenditure or decreases income is not considered to be irrelevant under this sub-paragraph . ”
Therefore, an increase in sales that exactly offsets an increase in expenses should be fine as long as there are employers paying the new tax and employees receiving the credit.
If all employers chose to raise wages to the target wage instead of paying the tax, neither income nor expenditure would change, so the proposal would violate the Byrd rule.
The tax rate is important for two reasons. For political reasons, it is determined how close the wages come to the target wage. The closer the tax rate is to 100 percent, the more problematic it becomes for compliance with the reconciliation rules.
Saez and Zucman state that “a 100% tax equates to an effective minimum wage of $ 15, but may violate the rules of reconciliation (since a 100% tax completely discourages the payment below [the aspirational wage]). ”
They propose gradually increasing the tax rate and their example ends with a tax rate of 80 percent. However, they find that “customization is easy [the aspirational wage] up to an effective minimum wage of $ 15, even if the tax rate is less than 100%. ”
Saez and Zucman also suggest introducing a safe haven exemption for small employers, such as family-owned restaurants, first to reduce their administrative burden.
The proposal stipulates that a small employer who pays all of its employees a wage equal to or higher than the new effective minimum wage will not have to administer the tax and its employees will not be entitled to their income being credited.
Saez and Zucman write that adopting a more exclusive definition of small employer increases the likelihood that the proposal will meet Byrd’s rule, as small employers are expected to largely use the safe haven, which would reduce tax revenues and loan payments.
If enough of them did so because of the broad definition of small employer, the household impact might be too small to pass the “random only” test. However, a broader definition of the term “small employer” would reduce the overall administrative costs.
If the inclusion of a legal safe haven for small employers is considered too problematic from the point of view of the Byrd rule, Saez and Zucman suggest delegating the design to the Treasury Department by adding a legal mandate, e.g. B. “The Treasury Department should find a way to reduce administrative costs for small employers without changing the economic substance of the law. ”
But a regulation-writing delegation would also not be able to withstand a Byrd Rule challenge, since writing regulations to reduce administrative costs would not change expenses or income.
Other possible problems
From the point of view of the loan recipient, a repayable loan may not be ideal as they only receive payment once a year when they file their tax returns and not regularly through paychecks.
To avoid this, Saez and Zucman suggest encouraging employers to immediately provide credit to workers on their paychecks. They view the Earned Income Tax Credit (AEITC) as a possible model for distributing the minimum wage tax credit through paychecks.
Saez and Zucman acknowledge that the AEITC was unsuccessful – hardly any eligible taxpayer has taken advantage of it – but differentiate it from the minimum wage plan by noting that employers have the information they need for the latter as it is at With this information only about the wages and the amount of the worker’s credit they would be entitled to the minimum wage tax.
However, the AEITC was complicated, and depending on how the minimum wage tax is structured, it could get quite complicated.
In contrast to a direct minimum wage enacted at the federal level, the minimum wage tax credit would result in different effective minimum wages across the country because the tax rate would be the same everywhere, but the amount of the increase would be the same depending on state minimum wages.
States with minimum wages above the federal level would have a higher effective minimum wage below the minimum wage tax than states with minimum wages at the federal level. Employers in states with higher minimum wages would therefore pay more minimum wage taxes per employee than employers in states with lower minimum wages, and workers in states with higher minimum wages would receive greater amounts of refundable credits than workers in states with lower minimum wages.
Managing new programs such as a minimum wage benefit would require an increase in IRS funding. If all employers chose to give the benefit directly to workers in their paychecks rather than transferring payroll taxes to the IRS, the administrative implications might largely be limited to the agency’s auditing role, but regulatory guidance would still have to be required, the IRS -Resources require problematic.
And if lawmakers choose not to adhere to a completely uniform tax and credit system, it could create additional complications for the IRS.
Saez and Zucman suggest that the tax and credit may be reduced in at least certain circumstances. For example, credit might be limited for some taxpayers, e.g. B. for second earners with a high earning primary earner or for relatives of high earners. The tax on employers would remain the same even if the loan amounts for employees were different.
Alternatively, the proposal suggests that certain employers could receive a lower tax rate if they had certain characteristics, such as working in disadvantaged areas. The difficulty with carveouts is that they add complexity.
However, Saez and Zucman suggest that these types of provisions could help the proposal conform to Byrd’s rule by distinguishing the policy from a direct minimum wage.