Thursday, September 5, 2013

Do higher minimum wages help to pay the bills?

James Surowiecki calls for a higher minimum wage, but do higher wages really help to pay the bills?

Not as much as you would think.

Part of it is because of taxes. We all know taxes get deducted from our paychecks, so when you get a raise of $2 an hour in Massachusetts you'll pay $0.11 cents an hour in higher state taxes, and $0.30 an hour more in federal taxes (most likely), and then of course contribute $31 cents toward social security and Medicare. So you only get to take home $1.28 of that $2/hour wage. If you spend the money on anything with a sales tax that is really just $1.20 since you'll have to use the other 8 cents to pay the tax.

So a $2 raise for a full-time worker (40 hours) isn't going to free up $80 in their budget, it is going to free up more like $48.

But that's not all. The real difference in take home pay is going to be far less than $1.20 in many cases because our government does a lot to help the poor--and stops doing it when people stop being poor. The $2 raise could cost you eligibility for Medicaid or reduce you subsidy for buying health insurance on the new exchange, reduce your allotment of food stamps, and shrink your Earned Income Tax Credit (EITC).

You'll lose $0.60 worth of food stamps for every hour you work and owe $0.32 more in federal income tax as your EITC is phased out. You'll have to pay around $0.52 cents more for your health insurance since you are more able to afford it. And you might also lose eligibility for affordable housing,  Pell Grants and other scholarships for your kids to attend college or free lunch if your kids are younger.

When you add it all up it is possible (and even likely if you have children) that a $2/hour raise wouldn't net you more than $10 a week in the bank. Most of the "income" would all disappear in tax deductions, higher taxes, higher expenses for health care, housing, and food.

That is not to say a higher minimum wage wouldn't help anyone out. Some people apply for few benefits and so have little to lose and people without children generally don't get much help from the government, even if they are poor.

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