Taxes

The Minimum Wage Debate and Tax Incentives

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Originally when I started over at Chicago Boyz I used to write regularly about tax policy. I haven’t written as much lately on that topic because the news has been completely dispiriting… at every turn it seems that the Federal, State and Local governments have taken positions to make the system more complex, confusing, and dysfunctional.

The goal of a tax policy should be to:
1. Achieve the revenue goals that they set out to meet
2. Do so in a way that has causes the least amount of distortions to the economy

Recently the idea of “fixing” our tax policies and incentives, for me at least, is aligned with recent discussions on the idea of raising the minimum wage. The minimum wage is $7.25 / hour, although this varies with state and local laws as summarized here. A suburb in Seattle, near the Seattle-Tacoma airport (Sea-Tac), recently passed an ordinance to raise the minimum wage to $15 / hour. This ordinance is a bit more clever than most, since the airport is unlikely to close or take significant actions due to the immense capital costs and constraints associated with doing so, and has a strong public element (politicians can just try to pass the costs on to air travelers).

These same discussions come up in Chicago, as fast food workers also have had some (small) demonstrations to try to raise the minimum wage to $15 / hour. While their campaign has sputtered out, it will likely re-surface and be championed by our governor.

The obvious difficulty with raising the minimum wage is that employers are not sitting ducks. There are many low wage workers in River North, for instance, working in bars, restaurants, cleaning services, and in various security related occupations (virtually every building has a set of doormen). If you doubled the minimum wage, for instance, all of these businesses and institutions would immediately embark on a host of labor saving initiatives and automation efforts. I am not an expert in these sorts of automation experts but can imagine people being replaced by computers, call centers handling service, and moving to self-service for customers in other instances. It is highly unlikely that they would just attempt to pass on the price increases and keep the same level of staffing; that would be economic suicide, especially with their competitors scrambling to reduce their labor expenses. Efforts that could not be automated would rise in price, which would likewise discourage consumption, until an equilibrium was reached.

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Archive Post – Military Rites, Practices & Legends: BX & Commissary Privileges

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(An archive post from [gasp] 2004, wherein I attempted to explain and demystify certain military practices and establishments to a strictly civilian readership. I was reminded of this series, as one of the chief effects of the fed-gov shut-down is that just about all of the military commissaries at stateside bases will be closed from about midday today. The resulting effect on the retiree and active duty population at stateside bases probably will be rather minor, especially for those bases in or near larger cities, since Walmart, Target, Costco, Sam’s Club and local grocery chains provide alternative sources.)

The main attraction of these privileges – access to the military base Commissary and Exchange – lies mostly in the fact that such access is forbidden to the usual run of civilians, and so they tend to think of them as vast Aladdin’s caves of riches and materiel things, to which they do not have the magic key! Alas, while I am fairly sure that the gold-plated bases in the military pantheon probably are pretty well stocked with the luxury goods, and may very well resemble Aladdin’s cave, at the ordinary level they are as Cpl. Blondie observed “full of stuff you don’t need.”
When I was giving the school-kiddy tours at Mather AFB, to kids who had never been on a military base before, I would have the school-bus driver take a circuitous loop around the base, and point out the various establishments: “A base is just like a city or a town– this is the Headquarters building, it’s like the Mayor’s office and the City Hall, over there is the housing area, where everyone lives with their families. There is even an elementary school for the kids. That is our grocery store, only we call it the commissary. We even have our own gas station… this is the Exchange, it is just like a small department store, with a little bit of everything…”

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Robert Reich Movie “Inequality for All”

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I saw the movie “Inequality for All” starring Robert Reich, the former labor secretary for Bill Clinton and a very short guy (he’s 4′ 11″) who is pretty personable and funny. Reich uses his day job as a university professor while teaching a class to illustrate his thoughts on inequality from the movie.

In the movie he attempts to link:
– decline in average wages, in “real” terms (adjusted for inflation)
– growth in the highest wages (the top 1%)
– with various factors, including globalization, automation, declines in unions, and the financial bubble
– income inequality with lower marginal tax rates on the rich

There are certainly some concepts in here than anyone can agree with. It would be good if more people in the USA earned a higher salary, had better educations, and were more productive.

In the movie he mentions Warren Buffett, who famously pays a lower marginal tax rate than everyone else in his office, which is due to the fact that he receives long term capital gains and dividend income which are taxed at a lower rate. This is grist for the “raise taxes on the wealthy” discussion, as Buffett plays the likable old man. However, what he fails to mention is that Warren Buffett is the very candidate that the ESTATE TAX is designed to catch… rather than nickel and dime him every year on his assets as they rise in value (and cause friction and force him to sell them off to meet the tax bill), the estate tax would be levied on the super rich and it would effectively make up for the lower marginal rate during his lifetime by taxing increases on his wealth at a rate of 40%, for all amounts greater than about $5M. However, Warren Buffett is choosing to “evade” these taxes by setting up trusts and / or giving it away to his favorite causes; if Warren couldn’t avoid his estate tax through these loopholes (the same way you or I can’t avoid the payroll or sales taxes) then 40% of his $60B estate ($24B) would go to the Federal government, to fund the “investments in people” that Robert Reich is so passionate about. Funny that Reich didn’t call that out (didn’t follow his narrative, apparently).

Another element he fails to mention is the growth in illegal immigration in the USA, and the havoc that this causes with unskilled labor (as they are willing to work for far less). It is funny because two professions he specifically mentions, meat packing and short order cooks, are magnets for immigrants and their arrival is a direct cause for falling wages in these fields. Not surprisingly, Reich didn’t want to alienate a core Democratic group.

There is a rich “pillow manufacturer” who makes $10M+ / year who also describes how ridiculous it is in his opinion that his marginal rate isn’t higher. That same entrepreneur says that he invests in “funds of funds” and due to this he makes money without creating any jobs. That is quite a statement – what do you think those hedge funds invest in? They invest in commodities, stocks, real estate and debt (I’m assuming). When you are an investor and you provide money for stock and debt you are supporting companies that, in turn, hire staff. I can’t believe that Reich let this comment slide, but since it was what Reich wanted to hear, why interject?

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Are We More or Less Free Than We Were in 1975?

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I recently sent this link to some friends, which lists “10 Things You Could Do in 1975 That You Can’t Do Now.” The list included:

2. You could buy cough syrup without showing an ID
…
4. You could buy a gun without showing an ID
 
5. You could pull as much cash out of your bank account without the bank filing a report with the government
 
6. You could get a job without having to prove you were an American
…
9. You could open a stock brokerage account without having to explain where the money came from
…
10. You could open a Swiss bank account with ease. All Swiss banks were willing and happy to open accounts for Americans

I opined: “We are FAR less free than we used to be. The “War on Drugs” is a major cause, but general government encroachment for its own sake is behind most of it.”

My friend Singapore Pundit responded:

[Lex], I have to challenge your theory that we are “FAR less” than free we use to be. Here is a short list of things from the 70’s which we are free from today: The military draft; 70% marginal tax rates on income; airline price regulation by the federal government; forced busing of school children; gas rationing by the federal government (Nixon); legalized monopoly of telecommunications; US gov. restricted travel to China, Vietnam, Russia and east Europe; banned importation of books based on ideology; tariffs on goods from Canada and Mexico; federal government price controls (Nixon); 25% of workers in unions (now it’s 7%). Here are somethings we have today versus the 70’s which I would argue make us freer: charter schools; home schooling; the internet and access by it to free information; 401K; more right-to-work states; right to vote for citizens over 18.

I had to concede these were all good things.

So, on net, are we freer or less free?

Chicago “TIFs”

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In Chicago a “TIF” stands for “Tax Increment Financing”. Here is a link to the City of Chicago web site which explains how a site qualifies as a TIF. Basically a TIF limits the amount of property tax the city can collect at the location and in effect gives the owner / developer a big tax break. There are many reasons listed by the city as to why a location might qualify but supposedly it is used to eliminate “blighting factors”.

The Chicago Reader has written a series of articles about how TIF’s are used to reward already rich developers with tax breaks. The Sun Times wrote one this week:

It’s time for another serious look at the pros and cons of Tax Increment Financing in Chicago — a tiff over TIF — the controversial economic development program that’s supposed to revitalize struggling neighborhoods by offering financial incentives to potential investors.

The “sweeteners” come from property taxes that, to a large extent, might otherwise be spent on education, housing, parks, libraries, and public safety.

That’s defensible when there’s enough tax revenue to go around, but it’s problematic in lean times, like now, when Chicago is closing schools, firing teachers, reducing library hours and trying to fight violent crime with fewer police officers.

Another concern is that many TIF “districts” are in affluent areas, especially in and around downtown, which violates the intent of the state law that created the program in 1977 to revitalize “blighted” communities.

Here is a project that is being built under a TIF; this is for a $29M park alongside the Chicago River at Canal and Lake Street. the “River Point TIF” is obviously located in an area that doesn’t appear to be tied to much blight…

While it is likely that politically connected developers and clout-heavy individuals are tied to this process, on the other hand this is one of the few ways the city actually and concretely assists businesses that generate all of the economic value for them. Businesses pay very high property taxes in Cook County / the Loop and then the tax breaks fall back to the selective few that run through this process. It is a very opaque process and there is limited information available on the TIF accounts and funding.

Cross posted at LITGM