Simulating the Minimum Wage in the Tax Code


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Yesterday the Senate parliamentarian, Elizabeth MacDonough, ruled that the reconciliation process cannot be used to increase the minimum wage. This was a strange decision because the CBO declared that increasing the minimum wage would have a substantial impact on government outlays and revenue and the parliamentarian has previously allowed other provisions into reconciliation, like drilling in ANWR, that had even less connection to the budget.

Vice President Kamala Harris could and should overrule MacDonough on this question. The whole thing turns on what the words “merely incidental” mean in section 313(b)(1)(D) of the Congressional Budget Act. MacDonough does not have greater expertise in defining those words than Harris who is herself an experienced lawyer and former Attorney General of the country’s biggest state.

But the Biden administration released a statement last night indicating that it was not going to overrule MacDonough.

So the question now turns to how could you achieve the same thing as a minimum wage increase that also stimulates MacDonough’s brain in the right way so that she gives the thumbs up instead of the thumbs down.

Senator Bernie Sanders is proposing to write a provision that would eliminate tax breaks for certain corporations that do not pay the proposed minimum wage. The idea behind this proposal is that using the tax code to enforce a minimum wage hike would clear the not-merely-incidental-to-the-budget bar even though a normal minimum wage hike does not.

This is a good general thought, but it seems to me that, if you are going to go down this route, there is an even cleaner way to do it.

The way the minimum wage works right now is that companies that pay less than it are subject to a penalty equal to 3 times the difference between the wage they paid and the minimum wage. So if the minimum wage is $7.25 and a company paid $5.25, they are subject to a civil penalty equal to ($7.25 – $5.25) * 3 = $6 for every hour of work they compensated at that level. This penalty is collected by the government through the civil litigation system and then paid to the workers who were victimized.

We don’t call these monetary penalties taxes, but there is no reason why they couldn’t be designed as a tax. After all, the ACA’s monetary penalty for not buying health insurance was declared to be a tax, both by the Supreme Court and then later by the parliamentarian who allowed the penalty to be reduced to $0 during reconciliation a few years ago.

To convert the minimum wage into a tax provision, all you need to do is add a section to the US tax code that declares a new tax equal to 3 times the difference between the wage paid by an employer and the desired minimum wage. The IRS would be charged with pursuing employers who fail to pay the tax and would then give over any money they collect to whoever reported the tax evasion (typically the victimized worker) as a whistleblower award.

This may seem a bit silly but then again everything about where we find ourselves is quite silly.