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Dollars & Sense: How to Raise the Minimum Wage, Improve our Workforce and Cover the Cost

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In my previous blogs on minimum wage , I discussed the challenges faced by minimum wage workers in climbing out of the poverty hole and the costs this imposes on our society. Now I would like to examine a good way in which the minimum wage could be raised without hurting businesses or the wider economy.

The lynchpin of this idea revolves around offering tax credits to businesses based on three criteria:

Lowest Wage Level

The U.S. government has long used tax credits to incentivize businesses to hire, invest, and innovate. This same principle can be applied to wages. By providing a tax credit for businesses tied to the lowest level of wages they pay, the government can encourage the de facto increasing of wages without even having to raise the legal minimum wage.

The biggest objection that business owners have to raising wages is that it is uneconomical for them since it eats into their profits; and that, in turn, can lead to less hiring. Tax credits can alleviate this problem and enable businesses to pay higher wages while maintaining their level of employment.

Wage-Employment Index

Wages and employment levels are two sides of the same coin and one is incomplete without the other. If wage levels depress hiring, that hurts workers, but if wage levels are excessively low, the benefits of higher employment are drastically reduced. To put it another way, low wages just create a larger pool of exploitable labor for businesses but do little to provide a real living for workers.

A good way to measure the tradeoff between wages and employment would be an index that grades a business in terms of both the number of workers it employs and how much it pays those workers. An index like this would measure the weighted average number of workers -- weighted by wages. For example, if a company employs 10 workers at $8.00/hour and ghfdd managers at $25.00/hour then the weighted average number of workers would be (10 * 8 + 3 * 25)/(8+25) = 4.7 workers.

What the above example illustrates is that while the company may be paying its managers a reasonable wage, the majority of its workers are being paid at substantially lower levels and that disparity throws a big bucket of cold water on the company's claim that it is a valuable employer in our economy. While it may employ more than a dozen people, its contribution to our nation's prosperity is dubious since a disproportionately large amount of the wealth is actually being distributed to a very few. And if you add senior executives like the CEO into the above equation, you can imagine how much more skewed this picture becomes.

The idea would be to offer tax breaks to businesses directly proportional to their wage-employment index, which a company could increase by 1) either increasing wages for the majority of workers, or 2) increasing their headcount meaningfully, both of which would benefit our economy and make tax incentives worthwhile.

Job Training

At the crux of the minimum wage poverty trap is the inability of low-income workers to develop new skills which are worth more in the marketplace. The reasons for this are brutally simple: The struggle to make ends meet and the incidental factors that accompany living in poverty conditions, such as sleep deprivation, poor health care, long commutes to work, lack of free time to further education, etc. -- all make it nearly impossible for such people to train themselves.

The solution for this must come from businesses, who need to invest in their employees and help them achieve higher levels of education and skill so that they can become more valuable to their employer and to society. But business owners often consider such job training the responsibility of employees themselves and an unnecessary expense for companies, especially during a time of high unemployment when workers of all skill levels are easily available and when jobs can be offshored to other countries.

Which is why this requires the involvement of the government, and the provision of tax incentives to businesses. The 360-degree benefits of a workforce with better skills and with the ability to contribute more to their employers and thus justify higher wages should be obvious. The advancement of workers is a worthwhile goal for both the private sector and the nation, and using tax credits to achieve this would be just as worthwhile as providing breaks to pharmaceutical companies to develop new drugs or clean energy companies to develop new technologies.

Paying the Piper

Now comes the hard part -- how to pay for the tax credits. The good news is that there is a simple and elegant solution to eliminate the burden on Uncle Sam: close tax loopholes that currently enable businesses to ship jobs overseas profitably and evade U.S. taxes by funneling profits to international entities.

Businesses make money in multiple ways by exploiting 'offshoring.' The first way is by paying lower wages since the cost of living in nations like China and India are considerably lower than in America and because it is easy to underpay workers in countries where worker protection is weak or even non-existent (Apple's fiasco with its Chinese manufacturing facility highlighted this situation very poignantly). Also, while there is no specific tax credit for sending a job overseas, companies are allowed to deduct the expenses of moving plants out of the country from their taxable income, which effectively gives them a tax break when they offshore jobs.

Another way in which businesses save money is by funneling profits through overseas dummy companies that are based in tax havens like the Cayman Islands, the Isle of Man, and the Bahamas. This type of money-shuffling enables companies to pay lower taxes in the U.S. and in the process siphon money out of our economy and into their own pockets (a more detailed analysis of these international shell games can be found in my piece, "Simple Math: How Corporations are Getting a Free Lunch from Uncle Sam at Our Expense.")

Closing the tax loopholes that reward businesses for leaving U.S. workers behind and playing games with Uncle Sam would help us offer them the tax credits discussed above, which would at once enable businesses to offer higher wages while maintaining their profitability, help our economy retain jobs that are currently being lost to other nations, and realize higher tax revenues from multinational corporations (who currently pay excessively low rates due to the blind spots in our tax code).

It is unfortunate that the business community refuses to acknowledge the long-term benefits to our economy of providing living wages to workers, but since that is the case, it requires the government to take proactive steps to ensure that low income Americans get a fair shot at realizing the American dream, and providing incentives for businesses to do the right thing would be a great place to start. At least it is a language that the private sector understands.

SANJAY SANGHOEE has worked at leading investment banks Lazard Freres and Dresdner Kleinwort Wasserstein as well as at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of two financial thrillers, including "Merger" which Chicago Tribune called "Timely, Gripping, and Original". Please visit his Facebook page for more information.