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An Alternative To Raising Minimum Wage Could Help Workers And Small Businesses, Too

Founder of Consciously Unbiased, an organization helping companies meet their diversity and inclusion goals.

The minimum wage debate is getting increased attention in American politics among both parties, and part of President Biden’s Covid-19 relief package included increasing the minimum wage to $15 per hour. That point in his stimulus bill did not pass.

It’s a complex issue, and many believe that raising the federal minimum wage is one of a myriad of solutions that would enable a decent quality of living for the roughly 1.1 million workers making minimum wage or less. I understand that raising the minimum wage seems like the right thing to do. As a business owner, I believe there is a better solution.

Raising the minimum wage could lead to small-business closure, reduced hours and increased unemployment. People may not realize that when you raise someone’s salary, it’s not only the salary that increases, the employer’s taxes also increase. This impacts companies’ decisions surrounding how many people to hire and can adversely affect the worker you’re trying to protect. While I am not a tax expert or an economist, I believe a better option would be to cut taxes on the lowest earners. This would support both workers and businesses.

Small businesses in particular have been struggling to survive in the Covid-19 economy. The nation can’t afford to put more fiscal pressure on them, as small businesses make up over 99% of all businesses in the U.S. Labor-intensive small businesses might not be able to afford higher wages within their existing business models; the result could be shorter or no hours for their employees, increased costs for the consumer or, at worst, business closure.

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Research finds that when minimum wage is raised, that prompts companies to replace workers with technology. This is obviously not the desired result. Moreover, you have to think of how increasing the wage may lead to decreases in hiring, as companies not only have to pay the increased wages but also taxes on those wages. Different cities have different costs of living, so businesses that are built in a particular city have a wage structure that supports that particular economy.

Supporters of an increase in the minimum wage often point to the Congressional Budget Office forecast that such a move could increase the wages of 17 million Americans who would otherwise be making less than $15 per hour, as well as many of the 10 million workers making around $15 per hour. However, the same forecast predicts that the wage increase would cost 1.4 million people their jobs. That is not a good trade-off, in my opinion.

The trickle-down economics theory was to give tax cuts to businesses so they in turn would hire more. I am not sure that premise holds merit. Companies and entrepreneurs want to be in control of how their money is spent. If you provide a tax cut to businesses, the counterargument could be that companies might then spend less and save the money. On the flip side, increasing taxes often incentivizes businesses to spend and hire to lower overall profits and, therefore, pay less taxes. Maybe that is the true trickle-down economics. Whatever your logic, why isn’t that same logic applied to workers?

Instead of mandating that businesses pay employees a minimum wage of $15 per hour — with, in New York for example, roughly 20% of their paychecks going to taxes and leaving them with about $12 per hour — the government could cut employees’ taxes. A minimum-wage worker in America currently makes around $15,000 per year if they work full time and pays $300 in federal income tax on $3,000 of their earnings.

When it comes to minimum-wage workers, offering workers themselves tax cuts rather than businesses could put more money in their pockets without the disruption to current business models that could result in reduced hires. Increasing take-home pay is also good for business overall, because it can lead to greater employee satisfaction and lower turnover. If you draw a line in the sand and say anyone who makes $X will be tax exempt, it essentially would give those workers a pay increase while not affecting businesses’ cost structures. It’s a win-win situation.

Today the federal minimum wage is $7.25 per hour, but over half of states have minimum wages above that — and seven states and D.C. either have approved minimum wage to increase to $15 in the future or have $15 per hour minimum wage already. Others are trending there, and many companies are setting that standard on their own. Rather than a minimum wage increase to $15 per hour, legislators could propose a tax cut for anyone making $15 an hour or less to qualify as tax exempt. This would effectively give them a $3 per hour wage increase. On top of that, trickle-down economics would say that would give them more discretionary income, which in turn could increase spending at businesses.

I believe putting more money into the hands of minimum-wage workers through tax cuts is a more effective solution for providing workers with a fairer wage. It could also channel money into local communities and businesses, which are not just economic instruments but also community hubs. The history of Detroit shows how economic stagnation comes at a huge human cost — that shouldn’t be replicated across the U.S.

If you look at where society is going and where businesses are leading, on their own merit they’re voluntarily increasing compensation where the government has failed to come up with a workable solution. Tax cuts for minimum-wage workers allow the government to step in and do the right thing for workers as well as for small businesses.

Tax cuts are a mechanism the government can use to increase workers’ take-home incomes without disrupting business and impacting the jobs and the people it is trying to protect. The bottom line is that taking this step could support workers and the economy as the nation heads toward post-pandemic recovery.

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