Monday, March 2, 2009

Minimum wage, social security and tax cartels

Three interesting components of this article:

1) A textbook explanation for why minimum wage increases unemployment and distorts labor-capital allocation decisions. Decent argument to be made that, net, the harm to individuals currently at the minimum wage caused by lowering the minimum wage is less than the gain to individuals currently unemployed who can take minimum wage jobs.

2) A good explanation of one way to partially mitigage Social Security issues. Wages tend to grow faster than prices; that's the definition of growth. Social Security payments in the U.S. are indexed to wage growth, meaning that Social Security payments actually increase in purchasing power over time. I understand why this is nice-sounding (people who have retired still get to benefit from further economic growth), but when you can't afford Social Security to begin with, indexing to prices lengthens the amount of time for which the program can remain solvent without lowering seniors' standard of living.

3) A warning of potential tax cartels. When countries raise taxes in isolation, productive people leave for lower tax areas (think Rolling Stones in Britain moving to France because of Britain's 90% marginal tax rate on high incomes). However, if countries coordinate the rise of taxes, productive people have nowhere to move. This is easier said than done, because there are a number of small countries (mostly former British colonies) that refuse to comply with Europe's attempts to do this. Without punishment, incentives to deviate from this scheme are high, so the OECD is blacklisting countries that don't raise taxes in concert with everywhere else.

This would be a tremendously bad thing for the world. Countries can harmonize tax rates but most can't force productive people to keep being as productive as they were. In the past, if England had a ridiculously high tax rate and the productive people moved to France or America, at least the world benefited from their productivity. Net loss to England (but less than just subtracting the productivity of those individuals, because world productivity went up), and net gain to everybody else. Under tax cartels, a productive individual who DOESN'T do his job for fun (as the Rolling Stones plausibly did) will cut back his hours instead of moving. The country he lives in benefits in the very-short term as short term tax revenues increase. Long-term, productivity reductions mean tax revenue suffers as well (see the Hinc and Linc post from February). Everybody else in the world suffers immediately.

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