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Whether raising the minimum wage would alleviate poverty or not has caused the public to argue intensely on either side of the issue, but what if the minimum wage debate isn’t the right one to have when addressing poverty?
According to a study conducted by the Congressional Budget Office, raising the national minimum wage to $10.10 per hour would bring 900,000 people out of poverty. As with everything in economics, there is a cost. The same study also finds it would cause a net loss of 500,000 jobs.
Some argue these job losses are a trade-off that must be made for the greater good, but how much “good” would be accomplished? How much would a minimum wage increase to $10.10 help families below the poverty line? The answer is not much. The Congressional Budget Office reports that “families whose income will be below the poverty threshold in 2016 under current law will have an average income of $10,700, CBO projects. The agency estimates that the $10.10 option would raise their average real income by about $300, or 2.8 percent,” up to $11,000.
In addition to the loss of jobs, the price of many goods would increase to allow employers to compensate for the minimum wage increase.
Fred Donnelly, the President of California Composites, which makes commercial plane parts, moved his company’s headquarters to Texas this year. When asked about the move he said, “This is the last thing I want to do, but I don’t see that I have a choice,” referring to the $15 minimum wage hike California passed. Is the solution to increase the minimum wage or something completely different?
One way to make the minimum wage debate obsolete would be to provide an unconditional basic income to every American in lieu of raising the minimum wage. Before conservatives dismiss the idea as some sort of back door to socialism, it would be wise to consider it was advanced by Milton Friedman, one of the modern conservative movement’s highly respected thinkers. He stated in his book, Capitalism and Freedom, “A negative income tax provides comprehensive reform which would do more efficiently and humanely what our present welfare system does so inefficiently and inhumanely.” Experts tend to equate the negative income tax to an unconditional basic income, UBI.
A UBI is not just a decades-old idea; it’s one that has been gaining significant attention in recent years. Libertarian political scientist Charles Murray published “In Our Hands” in 2006, which details what he believes to be an effective way to carry out a basic income plan. In June, Switzerland became the first country to vote on a basic income referendum. Although voters opposed the measure, it did bring widespread attention to the idea.
Under Murray’s plan, every American citizen 21 years of age and older would receive $10,000 of disposable income per year. There are, however, two main stipulations to his plan: The first one is that an unconditional basic income (UBI), would be funded by terminating “all other transfer payments and the bureaucracies that oversee them” as Murray put it in a recent Wall Street Journal article explaining his philosophy. This would eliminate the more than 80 welfare programs such as social security, food stamps, Medicaid, etc. Corporate welfare and farming subsidies would also need to be eliminated. Under Murray’s plan, those programs must be completely repealed before the first dollar on an UBI is spent – so they cannot be resurrected and “added” to an UBI at a later date.
According to Murray, with these measures in place, “as of 2014, the annual cost of a UBI would have been about $200 billion cheaper than the current system. By 2020, it would be nearly a trillion dollars cheaper.”
One of the points of opposition against a UBI is that it would diminish incentives to work. Ultimately, how an individual responds to this plan is up to them, but the way this specific UBI is set up would make work too valuable for most to stop. Earned income up to $30,000 would not result in any loss on the $10,000 due to taxes. Between $30,000 and $60,000 of income, the grant is taxable. At an income of $60,000, recipients would still keep $6,500 of the grant, and so would everyone in every other income level above that.
Since the grant is nontaxable up to a certain point and nontaxable after a certain point, every dollar a person earns outside of the grant is more money in their pocket. Stated another way, since there is a limit to how much a person can be taxed on the grant, the more a person works does not necessarily mean that they get to keep less of the grant. Of course, this will not incentivize everyone, but most will continue working once the grant is implemented.
Where does this leave the minimum wage debate? It becomes irrelevant. If a UBI of $10,000 were put into place, businesses could pay their employees the current minimum wage of their state, yet these employees would see their quality of life increase instantly. At the same time, there would be no adverse effects on these businesses, because the weight of being arbitrarily forced to increase their employee’s incomes disappears.
The United States might not be ready right now to start having a debate over an unconditional basic income. And no, it’s not going to solve all poverty problems, even if it’s adopted in its purest form. With that said, the UBI would allow businesses to operate freely and pay their employees a real market rate rather than an arbitrary amount set by government. While not perfect, this is an “out of the box” idea that could help alleviate poverty and make the minimum wage debate moot.
Victoria Hart (firstname.lastname@example.org) is an intern for the government relations department at The Heartland Institute.