Excellent Article in the Economist on Broad Based Tax Reform

I just read an excellent article in The Economist that encompasses almost all of my beliefs about tax reform: broadening the base, eliminating complications, and updating policy to reflect a changing world. Granted, the article harks on income inequality without giving any tangible solution or any tangible reason for why the concentration is happening–but overall, it is excellent.

Read it here: http://www.economist.com/news/leaders/21618784-taxes-are-best-raised-broad-base-many-countries-it-worryingly-narrow-too-reliant

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The Los Angeles Minimum Wage Hike: Not a Magical Pill

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In a recent editorial, the Daily Bruin Editorial staff praised Mayor Garcetti’s new plan to raise the minimum wage from $9 to 13.25. The editorial called the hike “necessary” and pointed to an inability to live on $9 an hour in Los Angeles. What the article fails to articulate is the true costs of the minimum wage. It does not reveal the minimum wage hike for what it actually is: a politically easy policy that requires little actual work from the mayor yet pays big dividends in the media and in the election cycle, all the while hurting the actual people it is trying to help.

I would like to address each of the falsehoods expressed in the Daily Bruin article one at a time. I will start with the claim that a minimum wage hike would help students pay off “significant debt” in loans. On the surface, this seems straight forward: a raise in the minimum wage equals greater earnings for those making the least. But, unfortunately, the situation is more nuanced. If there were no negative effects of raising the minimum wage, policymakers might as well set it at $50 an hour. This is not done, however, because like anything else, labor is a good bought and sold on a market. Workers are the suppliers, and firms are the consumers.

As a result, a minimum wage is a price control, plain and simple. When you keep the price of anything artificially above the market price, there will be a surplus. This sounds great, but what is a surplus in the labor market? Unemployment. So there is a tradeoff. Some individuals will benefit from a random raise, while others, especially new hires or those trying to get into their fields—will not be able to do so. In addition, some businesses will choose to use technology as a substitute for human workers, as has begun to occur in European restaurants. It is likely no coincidence that European nations have incredibly high minimum wages.  For these reasons, some students will find paying off loans easier, while others will find it impossible, because they do not even have a job.

The article seems to subtly understand this, so it then moves on to claim that a study by the Center for Economic and Policy Research proves otherwise. The article sites this one study, but fails to mention that the Center for Economic Policy Research is well known in the policy world as a progressive and left-leaning think tank. It also does not mention that one of the main case studies used is Washington, DC—a city with a massive public sector supported largely by nationwide taxes.  Another study by the American Action Forum found that for each dollar increase in a state minimum wage in 2013, the states that increased saw an average 1.48% increase in the overall unemployment rate, and a 4.67% increase in the teenage unemployment rate. Because a good portion of UCLA is composed of teens, this should not be taken lightly. And this study is not alone. Other studies and statistical analyses have found that in 2009, when Congress raised the minimum wage by only 10.6% (trivial in the face of the nearly 50% raise proposed by Garcetti) the nation saw nearly 600,000 teenage job losses, despite a 4% growth in GDP in the corresponding months. There is a strong body of evidence that points to negative employment consequences of raising the minimum wage.

The article secondly proclaims that the minimum wage somehow “saves the taxpayer” by shifting the cost of employment from welfare programs to companies. Once again, this is a surface level analysis. As I stated previously, a minimum wage hike of the magnitude Garcetti is proposing would result in real job losses, and would also create a higher barrier of entry for low skilled workers. These unemployed individuals would rely even more heavily on welfare programs, and any gains made from the few who benefit from a minimum wage would largely be overwhelmed.

Finally, the article accepts as fact the idea that raising the minimum wage will somehow make things more affordable. But given that labor is an input in many of the daily items used by everyone—groceries, fast food, transportation—it only makes sense that an increase in the minimum wage must result in some price increases. The Heritage Foundation recently released a report studying the effects a minimum wage hike to $15 would have on fast food prices. The results: most fast food restaurants would need to raise prices nearly 38%. The reason: most fast food restaurants operate on very small profit margins (around 3%) and their largest costs are labor and purchases. The same is likewise true for stores like WalMart (3.41% profit margin). Low cost retail and fast food restaurants truly have no room to pay higher wages, so they must choose between price hikes or labor cuts. Of course, a $13.25 wage will have slightly more moderate effects, but the result will be the same: higher prices and less employment. So while it is convenient to try and say that a minimum wage somehow increases equity and makes life more affordable, all it truly does is raise prices to match the wage increases or kill jobs.

The minimum wage is not a magical pill that the Mayor or any other politician for that matter can use to save the economy or help poverty. In fact, a great body of historical and logical evidence reveals it as more of a poison. If the Mayor believes in the cause of eliminating poverty, he could consider some more prudent policies like eliminating occupational licensing laws, eliminating the LA Business Tax, reforming parking ticket prices, reducing the Los Angeles County sales tax, and investing more in the broken Los Angeles roads system. But that is a story for a different time.

Link to original article: http://dailybruin.com/2014/09/02/editorial-minimum-wage-hike-for-los-angeles-is-necessary-feasible/