Saturday, April 5, 2014

Is There Truth In Advertising: Minimum Wage Increase Edition

Revisiting a subject from the first half of the semester: the marginal tax rate on poor people.

The Obama administration wants to raise the minimum wage. Fair enough.

But, did you know that the marginal tax rate on that is over 50%? Yep, for a single mother who is paid the minimum wage now, and is later paid the proposed minimum wage, the marginal tax rate is a little over 50%.


Digression: I figure, for household financial discussions, that our our marginal tax rate is around 45%. So, a minimum wage worker pays a higher marginal tax rate than a dual-professor family.


Now, do keep in mind that the usage of marginal tax rate in the two cases is different.

For the single mother, we are talking about her:

  • Increasing her hours by 0%
  • Increasing her wage by 39.3%
  • And so increasing her gross income by 39.3%
  • And increasing her net income by 19.6%

For me, we are talking about:

  • Increasing my hours by 39.3%
  • Increasing my wage by 0%
  • And so increasing my gross income by 39.3%
  • And increasing my net income by 21.6%

This is still a no-brainer for the single woman, not so much for my case.

So, it’s not like this is horrible. And you could make an argument that conservatives are overplaying their hand with this point.

But, for the purposes of this class, it’s useful for keeping in mind that not many people in policy positions are giving any thought to marginal tax rates on the poor.

P.S. I wonder if there’s any truth in advertising here: does the government let people know that they won’t get all of their minimum wage increase? I doubt it.

Via Carpe Diem.

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