THE BLOG
10/31/2013 11:27 am ET Updated Dec 31, 2013

Washington's Historic Opportunity to Help Low Income Americans

Now that the immediate budget crisis in Washington is over, the battle between Democrats and Republicans is back on familiar ground, namely, spending cuts and taxes. Given the ongoing differences between the two parties on those issues, it is unlikely that détente will automatically ensue but after the damage done to the political establishment by the shutdown, there is some hope.

More importantly, the urgency to compromise also offers our leaders a unique bipartisan opportunity to address the plight of low-income Americans.

While the government's efforts to bolster our economy usually focus on macroeconomic factors like money supply and GDP, the real struggle for many citizens stems from the microeconomic factor of low wages. About 3.6 million workers (or 4.7 percent of the workforce) in the United States are currently paid at or less than the federal minimum wage, which in itself is 35 percent lower than the wage required for a full-time worker to rise above the federal poverty line. Unfortunately, these are also the same people who will be most impacted by budget cuts to programs like food stamps, Social Security, and Medicare.

To address this, Washington can raise the federal minimum wage but that would likely create a different problem -- unemployment, since businesses will inevitably hire fewer workers in the face of higher labor costs. In a healthy economy, a small amount of incremental unemployment can be absorbed, but in an economy still recovering from a recession and in which job growth seems to be slowing again, each job matters.

A better solution would be to provide employers with subsidies to increase wages above the minimum wage, up to a cap. Here is how this could work: the government would subsidize the difference between an hourly wage of $13.25 (the level at which a full-time worker would be $2 above the wage required to rise above the poverty line) and the federal minimum wage of $7.25 per hour, which, assuming a 40 hour work week, would add up to $6 X 40 hours X 52 weeks = $12,480 per worker per year. The $2 cushion would average out those workers who make below the minimum wage. For 3.6 million workers, this amounts to $45 billion per year.

But where would this money come from?

By reducing the mortgage interest deduction, which currently costs our Treasury $69.7 billion per year in lost tax revenues. Even though the deduction is popular, IRS statistics show that only a quarter of filers actually claim it. In addition, the mortgage interest deduction tends to benefit wealthy individuals disproportionately (40 percent deductions for those with income above $400,000, 25 percent or less for everyone else). The Democrats will find it easy to justify reducing the size of the loophole. The Republicans, too, have long maintained a desire to simplify the tax code and expressed their willingness to trade some loopholes for a reduction in income tax rates, so this may well be an achievable compromise.

Both the Democrats and Republicans are on extremely thin ice right now. Following an extended government shutdown and the ugly showdown over the federal debt ceiling, both parties need to find bipartisan solutions to critical problems in order to rehabilitate their credibility with the American public. An innovative solution to help low income workers will go a long way towards achieving that.

In addition, the mortgage interest deduction is an easy tradeoff because it is itself a subsidy and one which has failed to provide the impetus for homeownership for average Americans the way it was supposed to. For the Democrats, and President Obama in particular, it will solidify their status as champions of equality, and for the GOP, it will help mitigate the impression that their loyalties lie solely with the rich.

Finally, with the many hundreds of billions of dollars of spending cuts and tax increases being bargained with already, a $45 billion subsidy is a relatively small expense to alleviate the suffering of 3.6 million citizens.

SANJAY SANGHOEE is a political and business commentator. He has worked at leading investment banks and at a multi-billion dollar hedge fund. His opinion pieces have appeared in TIME, Bloomberg Businessweek, FORTUNE, Christian Science Monitor, and Huffington Post, and he has appeared on CNBC's 'Closing Bell', TheStreet.com, and HuffPost Live on business topics. He is also the author of two thriller novels.

For more information, please visit www.sanghoee.com