Four simple, revenue-neutral ways to help both employers and employees

Let’s Solve the Real Problem Behind Inequality

by Will Handke and Ross Pomeroy
Republished from the blog We Could Be Great

The American economy is not what it once was. Picture it as a building: Its foundations were once thick, strengthened by a large middle class and a realistic minimum wage. Its breadth was considerable, with plenty of room for everyone and then some. Its reach was high, but not dangerously so. Its penthouse was well adorned, but not decadent. Surely, some Americans struggled, but most moved upward and many more had the chance to do so.

Now, the economy has grown hollow, its base and woodwork worn through, as middle-class wages have stagnated. Many of its rooms are now poorly kept and packed full, even as its penthouse suites grow roomier and climb higher and higher, their soaring windows accruing rosier and rosier tints, their few and fortuned denizens elevated to such a level that they forget those on whom their wealth was built and ultimately relies. Today, many struggle, some move forward, and fewer have the chance to do so.

Many focus on inequality and immobility in themselves. But ultimately, these are symptoms of the true problem: that work is no longer as valued in America as it once was, that amidst the economic strains of globalization and the ordinary ebbs and flows of capitalism, political inaction or deliberate policymaking has reduced the pay of workers and made it harder for businesses to pay them.

Fortunately, the solutions to this problem are not only simple; they are popular. To put it plainly, America’s lawmakers must act to make work pay and to make it easier to pay workers. Here are four ways to get started:

1. Raise the minimum wage.

Lawmakers have allowed the minimum wage to fall from its peak in 1968 — $10.79 in 2015 dollars — to $7.25 today, even as the productivity of American workers has more than doubled. By increasing the minimum wage to $11, we would increase the earnings of those most likely to spend them, thus boosting the economy, and create upward pressure on wages even for those who make above the minimum. This higher minimum wage should also be indexed to inflation so that gridlock or laziness in Washington will no longer be the cause of falling wages.

2. Flatten the payroll tax for employees. Reduce it for employers.

Today, to fund Social Security and Medicare, lower- and middle-income earners are taxed proportionally higher than the wealthiest earners, who don’t have to pay taxes on any income earned over $118,500. Furthermore, employers have to match these payments. To increase the value of work, the payroll tax rate (currently 7.65 percent) should be lowered and the $118,500 income cap should be removed, giving 85% of workers a tax cut, while broadening the payroll tax base to offset the lower rate. To make it easier for businesses to pay employees a higher minimum wage, employers should be exempted from paying any payroll taxes on each employee’s first $22,880 worth of wages (equivalent to a full year worth of work at an $11 minimum wage). This floor would then be recurrently adjusted for inflation.

3. Eliminate inefficient tax privileges.

To cover the tax revenue gap from the reduced employer payroll tax, Lawmakers should eliminate a slew of inefficient tax privileges. For instance, those who flip houses, trade stocks, or collect dividend checks pay lower tax rates on their earnings than those who are paid via salaries or hourly wages. Also, people who buy more expensive houses and take on bigger mortgages have their taxes reduced in proportion to the larger interest payments they make. For every such inefficient tax privilege we provide, money is lost that could be used to reduce taxes for all workers. Also, privileges such as these have long served to dis-incentivize wages and salaries relative to investment income. By eliminating them, we reaffirm a common-sense principle: that a dollar earned should be treated the same regardless of how it’s earned.

 4. Reduce welfare.

Lawmakers have perpetuated an inefficient and gluttonous welfare and disability system that pays people too much and lets them stay on public assistance for too long. For instance, as of March 2015, 3.4 percent of the U.S. population was being paid Social Security benefits for being “disabled” — a designation that has become far too easy to get. That’s up more than 50 percent from 1985. With a higher minimum wage, many workers would no longer need or qualify for welfare benefits, and those who were still eligible would have a greater incentive to work. Additional welfare-roll reductions could be encouraged by reducing benefits and reducing the amount of time that they may be used.

The effect of these simple, revenue-neutral changes would be positive, rapidly felt, and permanently sustained. With the value of work in the U.S. once again restored, our teetering American building would be shorn up, its residents once again on the path to prosperity, its facade once again worthy of the American Dream.

(The article is here. Note: The writers are millennial entrepreneurs who co-own a small nutrition bar company in Minneapolis.)