Sanders’ New Plan Would Hurt, Not Help, Low-Skill Workers

August 28, 2018

Sen. Bernie Sanders’ (I-VT) latest proposal to help low-income workers and to fight back against economic inequality would likely do just the opposite.

The legislation would levy a 100 percent tax on companies with 500 or more employees to offset the cost of federal benefits that the companies’ low-wage workers receive. The idea is that by requiring large employers to pay the full cost of their employees’ food stamps, Medicaid, and other forms of government assistance, the legislation would force companies to raise wages and would lessen taxpayers’ annual $150 billion burden funding federal assistance programs. A few scenarios could play out for a typical firm if such legislation were passed, but none of the likely possibilities is the reduction in wealth and income inequality. In fact such a tax would likely have a regressive impact, hurting low-income workers the most.

Sen. Sanders’ plan and other attempts to increase taxes on companies overlook that the party legally subject to a tax doesn’t necessarily bear the burden of the tax. Legally imposing a tax on a large company doesn’t guarantee that laborers won’t end up paying for it. Supply and demand are more likely to determine where the burden falls.

If this tax were in place, one possibility is that the firm raises the prices of its goods to offset the tax burden, meaning consumers effectively pay at least part of the tax. Economically, this case would be similar to the present situation, wherein taxpayers fund federal assistance programs. But in this scenario, only the company’s customers, rather than taxpayers in general, would pay the tax.

Another scenario is that the firm starts looking for ways to reduce costs to offset the new tax liability. This would likely prompt employers to reduce their reliance on low-skill employees by cutting wages or hours, or by limiting new hires. If low-skill workers suddenly become more expensive, it weakens the incentive to hire them. In some cases, employers might rely more on automation, since new technology would have a lower cost relative to low-skill workers under this tax. The result would be an increase in the economic inequality Sen. Sanders condemns.

It’s also worth noting how many companies this legislation would affect. Sen. Sanders has criticized “billionaire-owned profitable corporations” in the context of his bill, but in 2017, 23,000 private-sector firms would have met the threshold size to pay this tax. That’s less than 1 percent of all private-sector firms, but they employ 47 percent of all workers. The tax would apply to far more than just a few massive companies that make it into the news.

Despite Sen. Sanders’ goals, his tax proposal would increase the cost of hiring low-skill workers, resulting in higher prices for consumers or fewer job opportunities for workers. Neither of those outcomes would help individuals receiving government assistance.

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