Tuesday, April 12, 2011

In Defense of the Simple Plan to Save America's Economy

In one of my first posts, I presented a plan to revitalize and preserve America's economy using tax incentives to raise wages.

Below, I respond to various criticisms of the plan, and show why those concerns are unfounded. I have culled and paraphrased these criticisms from various sources.

“Higher wages increase the costs of goods and services, which will also raise prices.”

Right. So, I guess we just don't increase people's wages then. Problem solved? Hey everybody, no more raises ever!

Actually, no. Wages have to increase. Wages have been stagnant for quite some time for the vast majority of Americans. Meanwhile, the number of millionaires has increased in this country and the riches of the mega-rich has increased dramatically.

However, the important thing is that higher wages don't increase the cost of goods. Anyone who understands economics knows this to be true. Cost is a function of supply and demand. When demand increases, more of a product is sold, the production cost is divided across more products and this reduces the cost of production per item, decreasing the cost of the item. The only time demand increases the cost of an item is when demand outstrips the supply. For the counter statement to be true, it would have to have said that demand increases the cost of goods and services when the supply is limited, and higher wages would also have to increase the demand on every product in the market to the point where demand outstrips supply. It is not as if everybody is suddenly going to want 50 gallons of milk every week. The truth is that many products will become cheaper though it is possible some items of limited availability may increase in price.

Therefore, those who say increasing wages in this country is a bad idea think we should keep the workers poor because there is a chance that the demand for some items may increase their cost. They're saying the money is better off in the hands of the rich CEOs. Unless, maybe you think the money is better off in the hands of the government. Personally, I wouldn't mind an extra $20 grand in my salary, even if maybe the price of milk were to go up by 20 cents a gallon.

In summary, that higher wages increases the cost of goods is blatantly false.

“It will cause inflation.”

See the above. This counter is simply not true. Also, the term inflation should only be used to mean rising costs associated with the devaluation of money caused by the government printing more.

“Salaries & wages are already a write off. Corps only pay taxes on net. We'd be better off eliminating all subsidies and loopholes.”

Eliminating subsidies and tax loopholes will only increase government revenue. I guess this means the government can take better care of all the poor and struggling working class who become poorer as companies outsource their work.

My plan provides a tax write-off incentive for companies to increase wages and hire domestically. In the case of corporations only paying taxes on net profit, this is an additional write-off. In light of that, perhaps a write-off equal to 50% of a worker's wage would be sufficient. Although, I must say I'm in favor of eliminating all write-offs and deductions for everybody and taxing all income, regardless of the source (except for non-profit charities). I'd couple this suggestion with suggesting eliminating sales tax in America, putting the tax on the person doing the selling, not on the buyer. It is true that some localities depend on a sales tax, but I would rather they instead earn a local income tax from sales. I'm aware that could simply lead to building the cost of the “sales tax” into the price of the item instead of calling it a sales tax. I'm just not a fan of anything resembling double-taxation (taxed when you earn, taxed when you spend, ugh), but that's neither here nor there. I'm getting somewhat off-topic.

“Let's enact tariffs. This will discourage domestic companies exporting their manufacturing to areas of cheap foreign labor and importing their products for sale. Then, they'll hire domestically instead.”

Or, they'll just increase the cost of the product to make up for the tariff, pushing the cost onto the already struggling consumers in this country. Companies don't want to give up money. If there's a way around it, they'll do it.

“These subsidies aren't sustainable. How long will they last? I'd rather a recovery be a function of the market.”

We'll have given businesses a new tax write-off and eliminated other write-offs and loopholes. It's more likely the government would break even, given that the six richest corporations in America pay none or almost no Federal tax.

However, the government would likely earn more tax revenue overall from this plan, even if corporations end up paying the same amount or less taxes. The reason being that working Americans would be earning more, and therefore, paying more in income taxes. Unlike corporations, most working Americans are honest, tax-paying folk.

How long would this last? I'd make it permanent. After all, a recovery via this plan would be using the market itself. This isn't the government subsidizing wages; it's providing ground rules for fair, ethical, and moral capitalism. If you take those rules away, the same recession will happen all over again because all economic systems eventually break down. Everything needs ground rules. You don't play sports without rules, and driving without traffic laws (or road signs) would be chaos.

“Companies don't have the money to increase wages, even with a tax write-off.”

During our recession, oil companies have been posting record profits.
Taxes can be paid at the year's end. Companies can pay extra wages if they know they won't have to pay that in taxes.
There's also enough money in some CEO's salaries and stock options to increase worker wages. I'm perfectly OK if companies, in order to pay less taxes, decrease CEO paychecks and pay that to the workers instead.
The CEO of Occidental Petroleum made $76.1 million in 2010, as much as 1,465 workers making $52,000 a year. Cut that CEO's pay in half to $33 million and you can give a $26,000 raise to 1,465 workers.
His pay also increased 142% from 2009. The life-changing effect of that would have been far more greatly felt by someone making $52,000 a year who would have seen their salary jump to $73,840.
While true that this CEO's pay may not be entirely transformable into cash since he's paid in stock options too, why not pay the CEO a meager salary and the rest in stock options? Or, why not give workers stock options? Maybe, they'd care more about where they worked if they had a stake in it. Remember pensions? I thought not.

What if a hugely profitable company doesn't have a lot of employees? How will this help them?”

In this case, it will improve the standard of living for the employees that they do have if those employees are paid less than the maximum deduction amount. However, the company won't be able to claim a giant deduction for wages that reduces its taxes to next to nothing. It'll just have to pay its regular taxes. This answer was pretty obvious.

I should point out that I do believe there should be a minimum taxation amount so that no company can use deductions to reduce their taxes to zero. I believe that 5% to 10% would be good.

However, government is all about compromise so I'm sure that if this plan is enacted some politicians will include a few write-offs and deductions even for companies without sufficient employee numbers to significantly reduce their taxes. I would also support that even if we tax companies on all of their income instead of merely profit, that a company with no profit would not owe taxes in most cases. However, the basic premise is simple, and I have heard of no other plan to revitalize America's economy that will sustain itself and pay for itself as this plan can.

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