We Floridians had our hearts in the right place when we voted to increase the minimum wage to $15 per hour. But there are unintended consequences, as the Tampa Bay Times Editorial Board had detailed. For instance, stores and restaurants in small towns might find it difficult passing on the cost increases to their customers.
President Joe Biden also has proposed a national $15 minimum wage. That could make some domestic companies uncompetitive relative to foreign competition, thus driving them out of business, or offshore. It seems untenable and unreasonable to put the entire burden on the private sector. So, are there alternative avenues available to reduce income inequality?
One alternative is a negative income tax — a tax credit — where instead of paying taxes, the government pays you. The Earned Income Tax Credit is one such federal program for low- and moderate-income workers. Instead of taxing them, the government adds to their income. Twenty-nine states and Washington, D.C., have established their own EITCs to supplement the federal credit.
The amount depends on a recipient’s income, marital status and number of children. Workers receive the credit beginning with their first dollar of earned income; the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels. The average amount of the federal Earned Income Tax Credit was $2461 in 2020, which hardly creates a dent in reducing income inequality. The amount should be much higher for the lowest income workers, gradually phasing out as certain income thresholds are reached.
Another alternative is to provide all adults in the country, regardless of income, a basic income by the government regardless of them working or not. It’s called a universal basic income (UBI). Ex-presidential candidate Andrew Yang proposed a $1,000-a-month UBI for every adult — translating to about $5.75 per hour for full-time workers — which would cost $2.8 trillion each year less any offsets from the consolidation of other programs. He proposed covering that substantial cost by shrinking the size of other social programs, imposing a 10 percent value-added tax on businesses, ending the limit on Social Security payroll taxes and putting in place a tax on carbon emissions that would pay for the UBI.
A value-added tax can be regressive and a tax to reduce carbon emissions — if successful — will reduce tax revenues over time, so instead the money could be collected by increasing personal income taxes. It should be designed such that for the middle class as a whole it would pretty much be a wash. They would pay X dollars more in taxes and also receive the same amount as their UBI. But if someone lost their job, they would not pay taxes and the UBI would serve as their unemployment benefit. No forms to fill out or bureaucracy to negotiate.
The majority of the tax burden would fall on the richest — the top 10 percent who own 70 percent of the country’s wealth. They have benefitted mightily from automation and globalization at the expense of working-class Americans who lost their well-paying jobs to the aforementioned trends. Over the past 20 plus years the return on labor — working class wages — has declined while the return on capital — what the rich own such as businesses and stocks in corporations — has increased. So, some social engineering to reverse that trend should be evaluated.
Corporations collect a ton of data from all of us — for which we are paid nothing — to automate and design artificial intelligence systems that increase their profits. So, companies that are developing driverless transportation, and other enterprises such as Ancestry.com that are collecting our data should pay a surtax.
The growth of automation threatens to leave many Americans without jobs that pay a living wage. A 2019 report by the Brookings Institution found that 25 percent of all U.S. jobs are susceptible to automation. Jobs involving routine tasks such as those in manufacturing, transportation, office administration, and food preparation, are most vulnerable. A UBI while insufficient to live on, will supplement income from the lower wage or part-time jobs that displaced workers are able to find.
A UBI would have been particularly helpful during the pandemic. Desperate citizens would not have to wait months for Congress to pass aid packages. According to economists Alan Blinder (liberal) and Glenn Hubbard (conservative), the aid distribution was not well-targeted. Many of the lowest-income households received nothing while funds went to households well above any reasonable definition of “middle class.” The assistance was not even targeted to people whose incomes were damaged by the pandemic.
The city of Stockton, Calif., has experimented with a UBI which gave 125 residents $500 a month for 24 months. About 40 percent of all spending has been on food, 25 percent on merchandise, 11 percent on utilities and less than 2 percent on tobacco and alcohol. Less than 2 percent of recipients are unemployed and not looking for work, thus correcting the notion that many will squander the money or stop working.
The Federal government should limit increasing the minimum wage to $10 and initiate UBI pilot programs -paying $1000 per month – to selected (small) samples of the population for a year and to see how it works and to iron out kinks. The tax code can then be changed, and the program rolled out to the entire country. Subsequently, Floridians could introduce a new ballot initiative that replaces the prior hourly wage increase from $15 to $10. But if the UBI leads to an overabundance of workers quitting full time jobs to work part-time — a seemingly unlikely event — the solution might be to come up with a combination of a UBI and an EITC.
The right and their media supporters will feign their usual disdain for “socialism”. So, convincing working-class whites that free-market solutions and tax cuts — that mainly favor the rich — will not change their declining fortunes is vital. Well-paying manufacturing jobs by the millions are not returning to America. They will have to rely upon social engineering to earn a living wage.
President Joe Biden and Sen. Mitt Romney have proposed significantly expanding the child tax credit and dropping many of its restrictions, in effect turning it into a near UBI for children. The aim is to reduce child poverty, which is higher than in most advanced countries. It may also become the only major benefit in the United States that achieves near universality.
Demographers forecast that there should be adequate jobs available in the future. But because of automation and globalization, many of these jobs will be in low-paying sectors such as elder care, travel, and the gig economy. The decision we have to make is — should the worth of a person’s work be left to the forces of demand and supply or should the richest citizens of a rich nation help alleviate income inequality and poverty. You decide.
Murad Antia teaches finance at the Muma College of Business, University of South Florida, Tampa.