The House of Representatives

The House of Representatives recently voted to increase the minimum wage, but the measure is being held hostage in the Senate by demands for tax relief for small businesses supposedly burdened by the wage increase. That may sound fair to some, but a closer review shows the tax provisions are clearly more inspired by politics than credible equity considerations or sound economic reasoning.

Yes, a minimum wage hike will have effects. An increase to $7.25 an hour could directly benefit nearly 6 million workers, lifting the incomes of many families currently under the poverty line or not far above it. But critics also claim the boost, estimated to cost employers about $13 billion annually, would result in higher prices and fewer jobs. That's far from certain, and raises an important question: Who would be harmed, and, if they are, should they receive compensation?

Certainly, some companies will be forced to raise wages. But there is no precise way for government to predict which ones will be affected or by how much. Nonetheless, the Senate bill provides liberalized depreciation rules, kinder tax treatment of "S corporations" (which reap many benefits of incorporation without being liable for the corporate income tax), and an expansion of the Work Opportunity Tax Credit as compensation for paying low-wage workers more.

But the proposed breaks pertaining to depreciation and S corps could just as easily benefit owners not affected by the wage increase, those helped by it (say, high-paying restaurant owners whose lower-paying competitors would be forced to raise salaries), or even people who don't currently own a small business but invest in one in the future. In fact, the tax cuts could benefit a business with no minimum-wage employees--or one with no employees at all--because they're unrelated to labor costs, past, present or future.

The more generous treatment of depreciation allows a business to get larger deductions for the purchase of capital equipment or improvement of its facilities. That means, in effect, returns to new investment would be subject to lower taxes. But under the Senate bill, this new investment can be undertaken by anyone, and has nothing to do with whether the minimum wage hike affected the benefiting taxpayer.

Even worse, the tax breaks have nothing to do with whether minimum wage workers are retained or added. New investments might well require more workers, but not necessarily low-wage ones. Or the tax break could make feasible an investment that reduced an affected employer's labor costs, allowing him to substitute capital