Thomas MaCurdy: The Minimum-Wage Stealth Tax on the Poor - WSJ

Thomas MaCurdy: The Minimum-Wage Stealth Tax on the Poor - WSJ

My analysis, using the Bureau of Labor Statistics’ Consumer Expenditure Survey, showed that the 1996 minimum-wage hike raised prices on a broad variety of goods and services. Food purchased outside of the home bore the largest share of the increased consumption costs, accounting for 21% with an average price increase of slightly less than of 2%; the next highest shares were around 10% for such commodities as retail services, groceries and household personal services.

Overall, the extra costs attributable to higher prices equaled 0.63% of the nondurable goods purchased by the poorest fifth of families and 0.52% of the goods purchased by the top fifth—with the percentage falling as the income level rose.

The higher prices, in other words, resembled a regressive value-added, or sales, tax, with rates rising the lower a family’s income. This is sharply contrary to normal tax policy. A typical state sales tax has a uniform rate—but with necessities such as food excluded, and this exclusion (which exists as well in countries with a value-added tax) is adopted expressly to lower the effective tax rate on consumption by people with lower incomes.

My analysis concludes that more poor families were losers than winners from the 1996 hike in the minimum wage. Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices.

Consider a McDonald’s restaurant, often cited as ground zero in minimum wage debates. To cover costs of a mandated increase in the earnings of McDonald’s lowest-paid workers, customers pay more for the company’s food. The distributional question becomes: Which group comes from the least well-off families: McDonald’s customers or its lowest-paid workers? Economy-wide evidence shows that the customers disproportionately come from low-income families.