Minimum Wage, Pensions, and the Estate Tax

July 31, 2006

Early Saturday morning, the House passed a Republican-led measure that would raise the minimum wage by over $2 over the next three years, while at the same time, cut estate taxes and ensure extension of a few above-the-line tax deductions. Also, pension reform was part of the bill as well. From the Washington Post:

The House last night voted to boost the minimum wage for the first time in nearly a decade while also permanently slashing the estate tax, a coupling that GOP leaders calculated might garner enough Senate support to become law.

House lawmakers also approved the biggest overhaul of the nation’s pension laws in 30 years.

In the rush to bolster their party’s accomplishments before leaving today on a five-week summer break, House Republican leaders effectively took a gamble. If the Senate follows the House and passes legislation shoring up the pension system, raising the minimum wage, permanently cutting the estate tax, and extending such measures as a research-and-development tax credit, Republicans can say they departed for the summer in a flourish of accomplishments.

But the maneuvering by House and Senate GOP leaders to package the measures over the objection of some Senate chairmen caused severely bruised feelings. Lawmakers from both parties said last night that the legislation could easily collapse in the Senate, underscoring Democratic contentions that Congress has become dysfunctional.

“It’s a risk,” said House Majority Leader John A. Boehner (R-Ohio), “but I think it’s the only way to proceed.” (Full Story)

Among the tax deduction provisions extended were the deduction for state and local sales taxes. This allows those people in states with little or no income taxes yet high sales taxes to claim the state and local taxes paid. While this will treat taxpayers across geographies more equally, a better move would be to repeal the deduction for state and local taxes altogether.

Another provision allows educators to deduct part of their “work-related” expenses. While this may seem noble, what is to stop Congress from extending this to any other profession that they see as worthy of being able to deduct a certain portion of their expenses? Aren’t firefighters worthy of such treatment? How about police officers? Also, why should it depend upon the salary of the teacher since it is a deduction and thereby its value is a function of the marginal tax rate?

Also included in the legislation was an extension of the above-the-line deduction for tuition paid. Again, while this may seem to be promoting education, it is not without its costs. As with any subsidy, it can cause the price of the final product to increase by a large fraction of the subsidy. Also, this deduction creates more confusion in the tax code because it is an either/or for this above-the-line deduction versus the education credits. This requires certain individuals to make multiple computations as to which tax reduction tool would provide more savings — the deduction whose value depends on the marginal tax rate the individual faces or the education credits (either Hope or Lifetime Learning), which have phaseout ranges that kick in at a relatively low modified-AGI level just above $40,000 for single filers.

As for the estate tax, it should be reformed in a bill on its own or better yet, as part of fundamental tax reform, and should not be part of political logrolling. Specifically, the other special tax provisions like wind energy credits that were included in order to lure certain members of Congress are examples of extremely poor tax policy and fly in the face of any serious comprehensive tax reform effort.

Finally, increasing the minimum wage, which is one of the most poorly targeted anti-poverty policies, should be debated in the context of tax provisions like EITC and social program spending policies in order to give a proper perspective on what government’s anti-poverty goals are, and should not be used as a political football to pass other tax measures. For more on the minimum wage, check out BLS statistics here giving a profile of those who earn a minimum wage salary.

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