Wealth of Nations August 2006

Two Wrongs Don't Make a Right

Twinning a radical cut in the estate tax with an increase in the minimum wage isn't just a cynical political ploy. It's bad policy--on both counts.
More

Sometimes you have to wonder whether the effort legislators devote to plotting tactical advantage over their opponents has entirely crowded out considering the issues on their merits. Every democratic system involves some kind of balance between the two, of course: There is no point in being too purist about this. But a measure that passed the House last weekend, and which preoccupied the Senate for much of this week, did not weigh principle against expediency so much as recast the entire system as a parody of political degeneracy.

This so-called "trifecta" legislation proposes in one measure to raise the minimum wage, radically cut the estate tax, and extend a variety of expiring tax breaks. At most, only a handful of people in Congress would advocate both of the first two proposals—and therefore, on the face of it, the measure should have gotten nowhere. Most Republicans think it is a bad idea to raise the minimum wage. They argue that it will add to unemployment and slow the economy. The great majority of Democrats think it is a bad idea to virtually repeal the estate tax. They say that with inequality rising, and the long-term budget deficit a serious problem, a huge tax cut for the super-rich is wrong.

Why then did the House pass the bill? The Republican leadership calculated that some Democrats want the minimum-wage increase more than they hate the estate-tax cut, and would therefore back the measure. This tactic worked in the House. Thirty-four Democrats voted for the bill. If it works in the Senate, the Republicans would get what they want most: the estate-tax cut. (What about the rise in unemployment that Republicans normally say would result from a higher minimum wage? To hell with it.) And if the tactic fails, all is not lost, because Republicans will be able to say that they wanted to raise the minimum wage and Democrats would not let them.

If this is good politics, good politics stinks. Senate Minority Leader Harry Reid, D-Nev., called the bill "a cynical, cheap political trick" and promised to defeat it. As this column closed, the measure's fate was unclear. But here's hoping that Reid succeeds and it does fail—and that, in due course, the Republicans' intended spinning of the vote arouses the contempt it deserves.

The bill deserves to fail not only because it is wrong to bundle policies in a way that precludes, by design, proper debate. The case against it is stronger than that—stronger than Reid believes. He opposes the estate-tax change, and he is right to. But the Democrats are keen on a minimum-wage increase. They are wrong about that. Raising the minimum wage is a bad plan. Actually, as bad ideas go, it is up there with repealing the estate tax. So this politically ingenious trifecta, this tactically shrewd amalgam of dissonant proposals, is not merely an offense against the spirit of deliberative democracy, it also turns out to be a sackload of terrible ideas.

I don't oppose cutting the estate tax for the reasons most critics of that idea emphasize. Many Democrats and liberal commentators talk as though high taxes, other things equal, are a good thing. High taxes, they appear to think, are an expression of social justice in their own right: They are stopping the rich getting away with it. High taxes are redemptive, a meritorious repudiation of the "free-market system" (as though the United States has such a thing), a vote of confidence in government, and an expression of the country's commitment to fairness. You rarely get a sense from this side that taxes are a regrettable necessity. I'm guessing that most Democrats, given the choice between (a) repealing the estate tax and (b) leaving it in place and burying the proceeds at sea, would choose (b).

Low taxes, other things equal, are good. Economic liberty is good. The country has no prior claim on the income and wealth that individual effort and private enterprise generate. It is a good thing in itself that individuals keep the fruits of their labor and their saving, and are free to give or bequeath their wealth as they see fit. This applies to rich people as much as to anybody else: Being rich does not repeal your human rights. Arguments about the growth-promoting effects of economic liberty, important as they are, come later. The first reason for low taxes is that it is a good thing for people to retain as much of their income as possible; the second argument is that the more they retain, the faster the economy will grow. Societies that lose sight of these ideas are heading for trouble.

So it is a pity that we have to tax anybody, even the rich. But, to be sure, taxes are necessary as well as regrettable—especially if you intend the government to spend with something approaching complete abandon, as this administration has done. Everything the government spends must be paid for by taxes today or taxes tomorrow. So the question arises, which ways of taxing do the least harm?

Much as I object to many of the arguments posed in favor of it, the estate tax is one of the least bad taxes I can think of. Taxes that discourage pollution and other social bads are best of all, of course. If we repealed the estate tax and replaced it with a higher gas tax, that would be a good thing. But the Republican leadership proposes to replace the estate tax with even higher borrowing—meaning, most likely, higher income taxes at some future date—and that makes no sense at all. Higher income taxes do far more harm to incentives than the estate tax. The claim you sometimes hear that estate-tax cuts will be wholly self-financing (because they will spur investment, and hence incomes) has no evidence to support it, and does not deserve to be taken seriously.

Democrats are on the right side of this argument. But they are wrong about the minimum wage. Republicans talk speciously about the "death tax"; Democrats match that brainless demagoguery by saying that a higher minimum wage would transfer income from (exploitative) corporations to the poor. This is nonsense.

The cost of a rise in the minimum wage will be passed on to consumers in the form of higher prices. It is a tax by another name—not on the rich, but on everyone, including the nonworking poor, and workers who are paid more than the minimum wage but are still struggling financially. And does it even help those in minimum-wage jobs? Many of them, yes, to be sure. But some will lose. Although the evidence is not clear-cut, most academic studies of the question in this country and abroad—as well as common sense—tell you that raising the minimum wage will reduce the demand for low-wage labor, and therefore cost jobs.

Concerns about stagnant or falling wages, and about the plight of the working poor, are entirely justified. New policies are needed to confront this problem. It deserves to be addressed much more vigorously. But the collateral damage from a higher minimum wage, especially among the people it is intended to help (people looking for low-income jobs), may be quite high. There is an alternative. Explicit wage subsidies, such as the Earned Income Tax Credit, are a far better approach.

If you want to help people on low incomes, subsidize low-wage jobs; don't tax them. A streamlined and expanded EITC increases the demand for low-wage labor; a higher minimum wage reduces it.

The drawback of an extended EITC, of course, is political. Its costs are relatively transparent. Anybody proposing it therefore has to explain how it will be paid for—in other words, which taxes would have to rise to cover the additional outlay. (You already know my answer: the gas tax. Failing that, I would favor an increase in the basic rate of income tax if the proceeds were used to enlarge the EITC.) Politically, it is so much better to imply that other people—money-grubbing companies and their fat-cat shareholders—will pay. So much better, but completely dishonest.

So I hope that Reid succeeds in killing this smelly piece of legislation—and, for the sake of a healthier democracy, that the Republicans' political calculations on how to spin the outcome go wrong. Not wishing to discourage the Democrats in this endeavor, I will pass lightly over the fact that I will be even more pleased than Reid if his blocking of the bill prevails. He would regret the failure, this time, to raise the minimum wage. For me, that would be part of the good news.

Jump to comments
Presented by

Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

Get Today's Top Stories in Your Inbox (preview)

'Stop Telling Women to Smile'

An artist's campaign to end sexual harassment on the streets of NYC.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where Time Comes From

The clocks that coordinate your cellphone, GPS, and more

Video

Computer Vision Syndrome and You

Save your eyes. Take breaks.

Video

What Happens in 60 Seconds

Quantifying human activity around the world

Writers

Up
Down

More in Business

More back issues, Sept 1995 to present.

Just In