Consumption Rules

This past week the House of Representatives passed a bill that would increase the federal minimum wage from its current price of $5.15/hour to $7.25/hour phased in over the next three years. Minimum wage seems to be a hot topic for the Democrats (see Thank You For Nothing Massachusetts.) So why was the vote, which was 230-180, so conservatively lopsided, with 196 affirmative votes coming from Republicans, and 158 negative votes coming from Democrats? The bill, House Resolution 5970, also happens to be laced with significant estate tax cuts which would significantly reduce the tax burdens on those estates.

Read this interesting paper from the Center on Budget Policies & Priorities:

To: Congressional Correspondents, Assignment Editors

Contact: Michelle Bazie of the Center on Budget and Policy Priorities, 202-281-0872 or baize@cbpp.org

WASHINGTON, July 28 /U.S. Newswire/ — The Center on Budget and Policy Priorities today released the following comparison of House minimum wage and estate tax proposals:

COMPARING THE HOUSE MINIMUM WAGE AND ESTATE TAX PROPOSALS: Who Benefits and By How Much? By Joel Friedman and Aviva Aron-Dine

House leaders are following a legislative strategy that involves marrying an increase in the minimum wage to a sharp reduction in the estate tax. This approach juxtaposes policies that are aimed at two groups at opposite ends of the economic spectrum: minimum-wage workers for whom full-time work currently pays $10,700 a year, and individuals who have amassed estates worth millions of dollars over the course of their lives.

– Increasing the minimum wage would directly boost the earnings of 6.6 million workers, according to the Economic Policy Institute. These workers currently make less than $7.25 per hour — the level that the minimum wage would rise to by 2008 under the House bill — and are covered by minimum wage law. (EPI estimates that an additional 8.3 million workers would benefit indirectly from a minimum wage increase; these workers currently earn close to $7.25 an hour and would likely see a pay increase if the minimum wage were boosted.)

– In contrast to the millions of workers who would benefit from a minimum wage increase, the House proposal to sharply reduce the estate tax would benefit only about 8,200 estates in 2011, according to the Urban Institute-Brookings Institution Tax Policy Center. These are the 8,200 estates that would owe any estate tax in 2011 if the 2009 estate tax exemption level ($7 million for a couple, or $3.5 million for an individual) were made permanent. They are the only estates that would benefit from the further reductions in the estate tax proposed in the House bill.

The $2.10 increase in the minimum wage included in the House legislation has the potential to meaningfully increase the earnings of low-income households. For an individual currently working year-round at the minimum wage, it would mean an increase of nearly $4,400 over the year, as their annual earnings would rise from $10,700 to $15,100. For the average beneficiary of the minimum wage increase, the benefit would be somewhat less, given that many of the workers benefiting earn less than $7.25 an hour, but more than $5.15 (the current minimum wage). EPI estimates that the average yearly wage increase for the 6.6 million workers who would benefit directly from the minimum wage change would total about $1,200.

While these income gains could be critical to the well-being of a low-income family, the dollar amount of the gain pales in comparison to the dollar gains for estates benefiting from the House estate tax proposal. The Tax Policy Center estimates that in 2011 an estate tax with a $10 million per couple exemption ($5 million per individual) and with tax rates of 15 percent and 30 percent - similar to the proposal under consideration in the House - would yield an average tax cut of $1.4 million for the 8,200 beneficiaries, relative to making the 2009 estate-tax parameters permanent. Thus, the average tax benefit for these estates would be more than 1,000 times the average yearly income gain for workers who would benefit from the minimum wage change. Moreover, the benefit of the estate tax reduction would grow with the size of the estate — for example, the Tax Policy Center analysis shows that the 900 estates worth more than $20 million would receive an average tax cut of $5.6 million in 2011.

Estate Tax Reductions Once Paid For Will Ultimately Make Most Americans Worse Off

Finally, these comparisons ignore the fact that costly estate tax reductions must at some point be paid for. The Administration itself has recently acknowledged that the cost of its tax cuts eventually will need to be offset if the tax cuts are made permanent.

– If the costs are eventually financed partly through cuts in federal programs, such as Medicare, Medicaid, food stamps, veterans programs, and unemployment insurance, then the same low-wage workers who benefit from the minimum wage change included in the House bill will have to foot part of the bill for the estate tax cuts.

– Further, there are millions of Americans who will not benefit from the minimum wage increase but who will never accumulate multi-million dollar estates. These middle-income individuals will almost certainly lose from the House bill, when the measures ultimately needed to pay for the bill’s sharp cuts in the estate tax are taken into account.

The full analysis can be found at http://www.cbpp.org/7-28-06tax2.htm

and additional information at:

The Economic Policy Institute
Minimum Wage Issue Guide from the EPI
and the Tax Policy Center - a joint venture of the Urban Institute and Brookings Institution

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