Lohnersatz - negative taxation in low tax brackets

[German-Lefty]

I saw a German professor last night suggest "Lohnersatz" or wage-substitute to prevent jobs from being outsourced to eastern Europe. The word seems to have at least 3 different means. Anyway here's the proposal as I see it:

Basically in terms of progressive taxation create extremely low tax brackets where the tax rate is actually negative. This can be viewed as a government subsidy to on US labor.

For example we could create a bottom tax bracket with -50% for the first 200$ earned in a month. For the next 200 we could charge 0%.
Here are some income corrections:
100$ => 150$
200$ => 300$
300$ => 400$

The goal of such a system is to allow people with low end jobs to compete with cheap foreign labor, just like we subsidize agriculture to protect our farmers.

I could see it viewed both positively and negatively:
a) If it was used to replace welfare like "workfare", it might be socially unjust in some cases.
b) It might create ghost jobs, where someone pretends to work for a friend, and actually no labor is done, and they split the 100$.
c) It gives legal residents an advantage of illegal immigrants, which might be good.
d) It might be used to replace farm subsidies, and would work the same in all states and industries.

So what do you all think?

[German-Lefty]

1. Man nobody even touched my Post :-(

Guess we're all checking out the debates.

[bemildred]

2. We only give money to corporations.

No money for poor people. They might start to vote.

[On the Road]

3. Surprisingly, The Negative Income Tax is An Old GOP Idea

The concept is not bad, but it results in new types of cheating. Low-income workers could hide part of their income to fall into the negative brackets. Nonworkers could also invent income as you pointed out. Rates as high as -50% would be a huge stimulus for tax evasion.

It would require more audits at the low end, but more audits are needed anyway, in every tax bracket.

I don't think it would affect competition with foreign labor since businesses would still be bound by the same wage laws and labor market. Or, if it allowed some businesses to lower their wages, we're in effect subsidizing those businesses with tax revenue.

The more I think about it, the more raising the minimum wage to $10-15 an hour seems like the single biggest part of the solution. (This is all off the top of my head.)

And don't worry about the lack of posts. Economic subjects don't tend to draw a lot of responses.

[German-Lefty]

4. Are Higher or Lower wages the key?

"The Negative Income Tax is An Old GOP Idea"
Really, woah. Must be very old.

Or, if it allowed some businesses to lower their wages, we're in effect subsidizing those businesses with tax revenue.
Well we're subsidizing those businesses only if they produce jobs, which is way better than paying people to produce cheese nobody needs.

The more I think about it, the more raising the minimum wage to $10-15 an hour seems like the single biggest part of the solution.
This is way on the other extreme. Some say if you do this many people making bellow 10$/h will loose their jobs. Maybe you're right and that is the way. I don't know.

On theory says make it easier for companies to hire people cheaply here and we'll compete better in the world.

The other theory says none of us should work for cheap here, and then we'll force the rich to pay us more.

I think it's a question of which industry. If you're talking about fast food, sure McD will either go out of business in the US or pay people more. It might be good for them if we raise the minimum wage.

On the other side if you're talking about manufacturing, raising the minimum might just make them pack up and leave, since they can get the same job done elsewhere.

I guess that's a cool thing about Germany. They have collective bargaining decide what the minimum is for a particular industry. So the fast food guys can unionize and demand more pay, while the steel workers could bite the bullet in order to stay competitive with other countries.

Of coarse in the end what is needed is international unions.

[On the Road]

5. I Think it Was Proposed by Republicans

back in the late 70s or early 80s as an alternative to welfare. The idea was to provide a form of government assistance that gave lower-income people an incentive to work. Not a bad idea, although there are some problems in implementation.

Of course, once government assistance was decimated, the idea lost its appeal to Republicans, and it was too free-market for Democrats to pick up. But it's worth considering if there's a way to make it work. So much work at the low end is cash-only or poorly documented that I think it would be easy for a lot of working poor people to hide income to get that negative-tax check.

As far as the minimum wage goes, it's just too low now. In the early 70s it was the equivalent of $10-12 an hour and it didn't kill the economy. Fast food and retail would be hurt a little, but they're not overpriced now -- there's some room to grow. And Republicans were warning about price hikes when the minimum wage from $4.25 to $5.25. Didn't happen. When labor is that cheap, it's not used as efficiently. And it discourages investment in labor-saving equipment.

I didn't know that about German unions -- it seems like a good idea to set a minimum by industry.

[bemildred]

6. Yup. Only rich people are allowed to sit around on their butts.

Poor people need to starve if they don't do something productive.

WRT min wage, in 1965 you could support a family on min-wage. Now
you cannot. It should be raised so you can again, whatever that takes,
and the outsourcing of jobs to cheaper cost of living regions of the
global economy should be strongly penalized. Otherwise you are attacking
the US ecomony and standard of living like termites eating out a
dead stump.

[German-Lefty]

7. Cool

But it's worth considering if there's a way to make it work. So much work at the low end is cash-only or poorly documented that I think it would be easy for a lot of working poor people to hide income to get that negative-tax check.
Well you have that problem anyway if you've got a social system. Even after the latest rounds of reform we're still are ready to pay people a lot to not work.

It used to be if you lost your job you got 70% of your salary as unemployment. Now you're only eligible for that for a year, if you've been working several years. Then they roll you into the standard social welfare plan. You still get a couple hundred a month though.

It makes sense that if you're going to pay someone money to do nothing, you would be willing to pay him a little more to do something.

Anyway we do have problems with people collecting unemployment checks, and then collecting more money under the table. That's just part of the cost of welfare. It might be that negative taxation would make things better since you could only collect it on documented work.

The rule should be that you get unemployment + more if you work. I think you could setup a system where this is true. Where at no point would you get paid more to not work(or work under the table). Werther this is good for the economy not is another question. My guess is yes.

Well maybe it would be a good idea. My gut feeling is if you're worried about unemployment don't raise the minimum wage since that will discourage hiring. On the other side all those new wages might increase aggregate demand.

[On the Road]

8. Yes, I Think the Goal is to Create Proper Incentives

where working is always a better economic choice. There's some legitimacy to Republican claims that welfare tends to discourage work. The difference is that Republicans use it as an excuse not to do anything. Democrats should (and in many cases do) use it as a way to make the programs better.

Maybe you're right that the problems would be no worse than the current problems with welfare. My concern is that a lot of low-income people live week-to-week. They don't have sophisticated tax loopholes, but would jump at the chance to get a check for several hundred dollars or more, even if they have to cheat.

Sorry if that sounds like a Republican -- I deal with a lot of low-income people and this is the mindset. I also think cheating at the upper end needs a lot more auditing BTW.

[German-Lefty]

9. I think you can configuar this to make it work.

Well let's look at this way. We want take home pay to increase with every dollar someone earns before taxes. A person earning 0$/month gets welfare whatever that is let's say W.

We could have brackets at 0,500,1000.

Pre Tax => Take Home
0 => W
100 => W+100*(1+t1)
500 => W+500*(1+t1)
1000 => W+500*(1+t1)+(1000-500)*(1+t2)
2000 => W+500*(1+t1)+(1000-500)*(1+t2)+(2000-1000)*(1+t3)

We could set
t1=-20%
t2= 0%
t3= 10%

At no point in time am I discouraged from earning more. To earn my first few dollars Uncle Sam gives me an extra 20%. In the middle I pay no taxes on every dollar earned. After I get 1000 a month I will start paying taxes. At some point Uncle Sam does make a profit from me working, but it comes after 1000 where the t3 bracket balances out the t1 bracket. At some point W will be paid for.

Sorry if that sounds like a Republican -- I deal with a lot of low-income people and this is the mindset.
Well no it is a problem.

You just have to make sure doing the work required for cheating the system isn't worth it. The numbers up there will give you 100$ max for creating a fake job to work at. I'd hope that the guy would rather get a 500$ job and take home 600$ along with his W, than figure out how to cheat to just take home the 100$.

[DBoon]

12. Why shouldn't poor people

have the same opportunities to cheat on their taxes as the wealthy ;)

[DBoon]

10. Didn't Richard Nixon propose this

I never thought I would say this, but I really miss Nixon

[DBoon]

11. Reply to objection

it results in new types of cheating. Low-income workers could hide part of their income to fall into the negative brackets. Nonworkers could also invent income as you pointed out. Rates as high as -50% would be a huge stimulus for tax evasion

If we were talking about wage income, one could easily match the employees' claim with the businesses' filign - just do an automated match on the W2 filings. A business that collaborated on this sort of fraud would suffer severe penalties and would likely not do this to benefit low wage workers.

You couldn't stop people from hiding cash payments, but you can't do that anyway.

I don't see why this would be a bigger problem than say high income individuals attempting fraud by hiding income. Any fraud problem you have pointed out already exists in our tax system anyway. Personally, I'm willing to live with some level of fraud if the net result is a benefit to lower wage workers.

[German-Lefty]

13. Objection 1 dead, Objection 2 still problematic

it results in new types of cheating. Low-income workers could hide part of their income to fall into the negative brackets.
Now that I think about it, this wouldn't happen!!!

For low income people there is no reason to hide income. Every dollar reported results in a few cents incentive from the state. Until you reach a positive tax bracket there is no incentive not to report all earnings.

Non-workers could also invent income as you pointed out.
This is the real area where low income workers can cheat. Here's an example:
Al and Bob are unemployed. Al pays Bob to do something, and Bob pays Al to do something. From the government's point of view both are employed, so they should get a small subsidy.
This is fine by me, if Al and Bob are actually doing something, like Al painting Bob's house and Bob fixing Al's truck. The problem is making sure they are actually doing something, or at least they would do something, if they could.

Another fun question is what happens to wages in the long term. Will employers just cut salaries to where people take home the same about? This has to do with an area of econ, I'm still fuzzy about, but would love to know more. Is it that:
A) Employees get a salary equal to the profit they bring a company.
B) Employers pay people just enough money to survive.
C) Some negotiated point in between. (most likely)

In case A negative taxation will wind up directly in the employee's pocket.

In case B negative taxation does nothing. Hell tax the poor, that'll force businesses to give them a raise. It won't make a difference people will always take home what they need to survive.

In case C, I think it'll help some.

[bemildred]

14. Let them cheat.

Enron cheats, big corporations cheat, rich people cheat, why not poor people?
As long as it's small, who cares?
If it's not small, prosecute.