As St. Paul’s politicians prepare to hobble the city’s labor market with a $15 minimum wage without tip credit, D.C.’s are getting rid of it
Written by John Phelan
in Economics, Minimum wages, Employment
on October 18, 2018
PrintDespite economic theory and empirical evidence being against such a move, Saint Paul’s Mayor, Melvin Carter, seems intent on imposing a $15ph minimum wage on the city’s businesses. Not only that, but there will not be a ‘tip credit’, which would allow employers to pay tipped workers a lower wage and count tips toward the $15.
The experience of Washington D.C. shows just how bad this policy is. As the Wall Street Journal reports,
On Oct. 2 the D.C. City Council voted 8-5 to repeal Initiative 77, a ballot measure imposing a $15 minimum wage for all tipped workers by 2026. The wage hike was billed as a way to give workers financial stability and protect them from sexual harassment by restaurant patrons. But tipped workers realized the policy came with serious unintended consequences.
Before the measure passed in June, many restaurant workers wore buttons asking patrons to “save our tips” and “vote no on 77.” When Washingtonians passed the measure anyway, the workers pushed for repeal. Though restaurants pay a $3.89 hourly wage to tipped workers, “we choose these jobs because we make far more than the standard minimum wage” from tips, bartender Valerie Graham told the City Council.
Labor costs typically account for about 40% of a D.C. restaurant’s overall expenses. The Restaurant Association Metropolitan Washington estimates that raising the minimum wage to $15 for tipped workers would cost $600 million a year. Restaurants operate on a thin profit margin, as workers know.
“Increasing the base wage for tipped workers who already make well above minimum wage threatens those who do not make tips,” such as cooks, dishwashers and table bussers, Rose’s Luxury bartender Chelsea Silber told the City Council. Bartender Faith Alice Sleeper explained that “our support staff will lose their jobs first, many of whom are immigrants.”
Allison Kays, a general manager at Justin’s Cafe, said that as payroll expenses rose by more than $100,000 a year, the restaurant would likely save money by buying from “big box national suppliers” instead of local farms.
This echoes what Saint Paul’s tipped workers have said. As one Minneapolis tipped worker wrote in the Pioneer Press recently,
A tip credit guarantees that all workers will earn the full minimum wage at all times while allowing servers to count a portion of their taxable tipped income toward their hourly wage. This pay structure would protect both the income of tipped workers in full-service restaurants and the small businesses that employ us.
We want this tip credit because however you do the math, when the wage goes to $15 an hour, our reliable tipped jobs and incomes are in jeopardy.
Mayor Carter still has a chance to reverse course. It would be better for the city and its workers if he did this before passing the ordinance rather than afterwards.
John Phelan is an economist at the Center of the American Experiment.
Written by John Phelan
in Taxes, Minnesota Economy
on October 25, 2018
The Rochester Post Bulletin carries an op-ed today claiming that our ‘State’s taxes help support high quality of life‘.
If alarm bells aren’t ringing at the end of that, they will be when you read that “the state keeps attracting educated and energetic newcomers” and “keeps producing successful startups”. The authors appear not to have consulted the data before writing this. As we show in our forthcoming report, ‘The State of Minnesota’s Economy: 2018‘, between 2011 and 2016 Minnesota lost residents in every age group but saw the second biggest net loss among those less than 26 years old, according to IRS data, as Figure 1 shows. And, as Figure 2 shows, Census Bureau data show that in 2000, new and young businesses as a share of all businesses were 41% in Minnesota and 43% nationally. By 2014, the most recent year for which we have data, that number had fallen nationally to 34% but in Minnesota to 30%.
Figure 1: Net Flow of Taxpayers and Dependents to Minnesota by Age of Primary Taxpayer, 2011-2016
Source: Internal Revenue Service
Figure 2: New and Young Businesses as a Share of All Businesses, 2000-2014
Source: Census Bureau
The Post Bulletin goes on,
Now let’s look at the other side of the equation: quality of life. Minnesota consistently ranks near the top in “best places to live” surveys. The state was No. 2 in the 2018 U.S. News rankings, and No. 2 in the Politico rankings. CNBC ranked Minnesota No. 3 in “top states to live in,” and graded the state’s quality of life as “A+.”
By the way, CNBC, in a separate survey, also ranked Minnesota as the No. 4 best state in which to do business (sic), based on quality of workforce, technology and innovation, and quality of life.
It is true that Minnesota scores well, overall, on these rankings. But a closer look shows that there is no indication that its taxes are the reason for this.
The U.S. News ranking, for example, ranks Iowa top, Utah third, and North Dakota fourth. Of these, the recent Kiplinger state tax study ranks North Dakota among the ‘Most Tax-Friendly’, Iowa as ‘Mixed’, and Minnesota among ‘Least Tax-Friendly’. Very different tax policies but all in the top four ‘Best States’, according to U.S. News. The fact that Minnesota and two states bordering it score so well suggests that some factor related to geography might be more important.
And, once you dig down into it, U.S. News is actually pretty scathing about Minnesota’s taxes. Indeed, they rank our state 44th on the measure ‘Low Tax Burden’.
It is the same story with the CNBC ranking which the Post Bulletin cites. Minnesota comes 3rd here but North Dakota, with its very different tax policies, comes in 4th. How is it that North Dakota gets a similar quality of life with a much lower tax burden?
This survey is a subset of CNBC’s wider look at Top States for Business. Here, Minnesota came in 6th in 2018, down from third in 2017. And, again, when you drill down into how these rankings are constructed, Minnesota’s taxes get a roasting. The measure ‘Cost of Doing Business’ looks “at the competitiveness of each state’s tax climate, as well as state-sponsored incentives that can lower the cost of doing business”. Our state ranks a lowly 38th.
The Post Bulletin‘s editorial is wishful thinking without recourse to facts. This is a shame because there is ample and growing evidence that Minnesota’s high taxes are, indeed, harming its economy. To have a proper debate about our states economic future, we should always favor facts, however cold or hard, over comforting but inaccurate bromides.
John Phelan is an economist at the Center of the American Experiment
What happens when your state government gets so big, it tops the charts in terms of individual tax burden?
Craig Eyermann | October 18, 2018
Taxes are the price that regular people pay for government spending. Whether that spending goes to things and services that people want, like road repairs, schools, fire and police protection, trash pickup, public parks, or to things that people don’t really want, like sports stadiums or excessively lavish pension benefits for bureaucrats, the bill for all these things is ultimately paid through taxes.
For most states in the United States, the primary means by which state governments take money from their residents is through income taxes. As part of its 2019 State Business Tax Climate Index, the 81-year-old nonpartisan Tax Foundation has ranked U.S. states according to their individual income tax burden, which is the heaviest-weighted component of their state business tax climate index. The following map shows where each state has ranked according to state income taxes going into 2019.
Katherine Loughead explains what it takes for a state to rank well for their personal income taxes, and also what it takes to rank poorly:
States that score well on the Index’s individual income tax component usually have a flat, low rate with few deductions and exemptions. They also tend to protect married taxpayers from being taxed more heavily if they file jointly than they would be if filing as two single individuals. In addition, states perform better on the Index’s individual income tax component if they index their brackets, deductions, and exemptions for inflation, which improves revenue stability….
States that score poorly on this component are those that tend to have high tax rates and very progressive bracket structures. They generally fail to index their brackets, exemptions, and deductions for inflation, do not allow the deduction of foreign or other state taxes, penalize married couples filing jointly, and do not include LLCs and S corporations under the individual income tax code. The poorest-performing states on this year’s individual income tax component are New Jersey, California, New York, Hawaii, and Minnesota.
She also describes why these taxes are so important in assessing a state’s business tax climate:
The individual income tax is important to businesses because states tax sole proprietorships, partnerships, and in most cases, limited liability companies (LLCs) and S corporations, under the individual income tax code. However, even traditional C corporations are indirectly impacted by the individual income tax, as this tax influences the location decisions of individuals, potentially impacting the state’s labor supply.
That’s no joke. Just consider the case of New Jersey, where the state government has dug itself into a deep fiscal hole because of its excessive spending. In 2016, the departure of just one resident, hedge fund manager David Tepper, who relocated himself and his business to income tax-free Florida, created a fiscal crisis for the state government.
Two years later, New Jersey responded to its worsening fiscal situation by raising its taxes on incomes and corporations in a bid to replace the tax revenues it lost when Tepper moved. Consequently, the state now ranks last overall in both the Tax Foundation’s 2019 individual income tax rankings and its state business tax climate index.
There’s a real lesson to be learned here, but it’s questionable that New Jersey’s elected officials know what it is, because they also increased their spending by 8% in the same budget that imposed higher taxes on the state’s residents.
Burton Folsom | October 2, 2018
Capitalism Worked, But We Were Told It Didn't
We study history to learn from it. If we can discover what worked and what didn’t work, we can use this knowledge wisely to create a better future. Studying the triumph of American industry, for example, is important because it is the story of how the United States became the world’s leading economic power. Free markets worked well; government intervention usually failed.
The years when this happened, from 1865 to the early 1900s, saw the U.S. encourage entrepreneurs indirectly by limiting government. Slavery was abolished and so was the income tax. Federal spending was slashed and federal budgets had surpluses almost every year in the late 1800s. In other words, the federal government created more freedom and a stable marketplace in which entrepreneurs could operate.
To some extent, during the late 1800s—a period historians call the “Gilded Age”—American politicians learned from the past. They had dabbled in federal subsidies from steamships to transcontinental railroads, and those experiments dismally failed. Politicians then turned to free markets as a better strategy for economic development. The world-dominating achievements of Cornelius Vanderbilt, James J. Hill, John D. Rockefeller, and Charles Schwab validated America’s unprecedented limited government. And when politicians sometimes veered off course later with government interventions for tariffs, high income taxes, anti-trust laws, and an effort to run a steel plant to make armor for war—the results again often hindered American economic progress. Free markets worked well; government intervention usually failed.
Why is it, then, that for so many years, most historians have been teaching the opposite lesson? They have made no distinction between political entrepreneurs, who tried to succeed through federal aid, and market entrepreneurs, who avoided subsidies and sought to create better products at lower prices. Instead, most historians have preached that many, if not all, entrepreneurs were “robber barons.” They did not enrich the U.S. with their investments; instead, they bilked the public and corrupted political and economic life in America. Therefore, government intervention in the economy was needed to save the country from these greedy businessmen.
The Profound Influence Of Anti-Capitalists The catalyst for this negative view of American entrepreneurs was historian Matthew Josephson, who wrote a landmark book, The Robber Barons. Josephson, the son of a Jewish banker, grew up in New York and graduated from Columbia University, where he was inspired in the classroom by Charles Beard, America’s foremost progressive historian—and a man sympathetic to socialism. “Beard was nothing less than a spellbinder,” Josephson recalled, and Beard’s lectures helped guide him on a path to radical politics.
During the 1920s, after graduation, Josephson became a journalist, an expatriate to France, and, after his return, a part of New York’s literary elite. He and Beard reconnected in 1930, and the mentor urged his student to write a book denouncing the men who had launched America’s industrial power. “Oh! those respectable ones,” Beard said of America’s capitalists, “oh! their temples of respectability—how I detest them, how I would love to pull them all down!” Happily for Beard, Josephson was handy to do the job for him. Josephson dedicated The Robber Barons to Beard, the historian most responsible for the book’s contents.
Josephson began research for his book in 1932, the nadir of the Great Depression. Businessmen were a handy scapegoat for that crisis, and Josephson embraced a Marxist view that the Great Depression was perhaps the last phase in the fall of capitalism and the triumph of communism. In a written interview for Pravda, the Soviet newspaper, Josephson said he enjoyed watching “the breakdown of our cult of business success and optimism.” He added, “The freedom of the U.S.S.R. from our cycles of insanity is the strongest argument in the world for the reconstruction of our society in a new form that is as highly centralized as Russia’s. . . .”
Extreme Sympathy For The Communist PartyThough not a member of the Communist Party, Josephson co-authored an open letter of support for the Communist Party candidates for President of the United States in 1932. “We believe,” the letter said, “that the only effective way to protest against the chaos, the appalling wastefulness, and the indescribable misery inherent in the present economic system is to vote for the Communist candidates.”
Josephson traced the troubled capitalist system of the 1930s back to the entrepreneurs of the late 1800s. Thus, by explaining what he thought was the wasteful, greedy, and corrupt development of steel, oil, and other industries under capitalism, Josephson was explaining to readers why the Great Depression was occurring. “I am not a complete Marxist,” Josephson insisted, “But what I took to heart for my own project was his theory of the process of industrial concentration, in Vol. 1 of [Marx’s] Capital, which underlay my book.”
Josephson never intended to write an objective view of American economic life in the Gilded Age. He did little research and mainly used secondary sources that supported his Marxist viewpoint. As he had written in the New Republic, “Far from shunning propaganda, we must use it more nobly, more skillfully than our predecessors, and speak through it in the local language and slogans.” Thus he wrote The Robber Barons with dramatic stories, anecdotes, and innuendos that demeaned corporate America and made the case for massive government intervention.
The Lies Of The Robber BarronsWhen propaganda is the goal, accuracy is the victim. The Robber Barons is riddled with factual errors. On page 14 alone, Josephson makes at least a dozen errors in his account of Vanderbilt and the steamships. Here is one sentence with three errors:
At the time of the "shipping subsidy" scandals, aired in the Senate in 1858, it was seen that Vanderbilt and E. K. Collins of the Pacific Mail Steamship Line were the chief plunderers, sometimes conciliating, sometimes blackmailing each other.
First, E. K. Collins was never the head of the Pacific Mail Steamship Line; in fact, he had no connection with it at all. Second, Vanderbilt and William H. Aspinwall, the actual head of the Pacific Mail Steamship Line, were never “blackmailing each other.” Third, the Pacific Mail Steamship Line, not Vanderbilt, was the “chief plunderer.” Vanderbilt had no subsidy, and the Pacific Line did. In fact, Vanderbilt, through his low prices, exposed the federal subsidy as a scandal.
Perhaps more important than all of the errors, Josephson missed the distinction between market entrepreneurs like Vanderbilt, Hill, and Rockefeller and political entrepreneurs like Collins, Villard, and Gould. He lumped them all together. However, Josephson was honest enough to mention the achievements of some market entrepreneurs. James J. Hill, Josephson conceded, was an “able administrator,” and “far more efficient” than his subsidized competitors. Andrew Carnegie had a “well-integrated, technically superior plant”; and John D. Rockefeller was “a great innovator” with superb “marketing methods,” who displayed “unequaled efficiency and power of organization.” Most of Josephson’s ire is directed toward political entrepreneurs. The subsidized Henry Villard of the Northern Pacific Railroad, with his “bad grades and high interest charges” show that he “apparently knew little enough about railroad-building.” The leaders of the Union Pacific and Central Pacific, Josephson notes, “carried on [their actions] with a heedless abandon . . . [which] caused a waste of between 70 and 75 percent of the expenditure as against the normal rate of construction.” But it never occurs to Josephson that the subsidies government gave these railroads created the incentives that led their owners to overpay for materials and to build in unsafe areas. He quotes “one authority” on the railroads as saying, “The Federal government seems . . . to have assumed the major portion of the risk and the Associates seem to have derived the profits”—but Josephson never pursues the implication of that passage.
Swooning For Stalin Josephson “enjoyed writing about my ‘scoundrels’,” and when The Robber Barons came out in March 1934, it became the number one bestselling book of non-fiction in the U.S. for six months. Even more amazing, the author was not in America to promote his book. He left for Russia to explore Stalin’s communist experiment. While there, Josephson was a celebrity and was taken on carefully guided tours of Russian steel mills and shoe factories. He attended official dinners and even talked with select Russian writers and artists. He was ecstatic. The Soviet Union, Josephson said, “seemed like the hope of the world—the only large nation run by men of reason.”
Josephson, under careful Russian supervision, never met any of the hundreds of thousands of Ukrainians who were starving to death at the time under Stalin’s brutal collectivization; nor did Josephson see the Soviet gulags, or prisons, where thousands of dissenters were forced into hard labor and early deaths. Josephson also never realized that the Soviet factories he saw were often directly copied from Western capitalist factories—and were funded by Stalin’s confiscatory taxation. Instead, Josephson thought he had stumbled into a workers’ paradise, the logical result of central planning and superior leaders.
“Before people pass judgment on Comrade Stalin,” Josephson wrote, “they ought to come here and see his Works, his Opus Major, in many volumes with their own eyes. It is very impressive; and few other statesmen in all history have so much to show.” In truth, Stalin had almost nothing to show. His model industries—car factories, railroads, and hydroelectric plants, for example—were borrowed or built by Americans or Europeans, often with grain confiscated from starving Soviet farmers.
The Falsehoods Became The CanonWith his best-selling book out, Josephson came back to America to glowing reviews and massive sales. For example, historian Allan Nevins called The Robber Barons a “tour de force” and the Virginia Quarterly Review proclaimed it to be “required reading.” Even more important to Josephson, his progressive vision of economic history began infiltrating the writing of high school and college texts. The term “robber barons” became the new label for America’s leading entrepreneurs of the late 1800s—and beyond. Historian Thomas Brewer, who in 1970 edited The Robber Barons: Saints or Sinners? observed that the majority of writers “still adhere to the ‘robber baron’ interpretation.” Historian David Shi agrees: “For well over a generation, The Robber Barons remained the standard work in its field.” For many textbook writers, it still is. In the main study guide for the Advanced Placement U.S. history exam for 2015, the writers say, America [1877-1900] looked to have entered a period of prosperity with a handful of families having amassed unprecedented wealth, but the affluence of the few was built on the poverty of many.
Having condemned American entrepreneurs and promoted more government as the solution, Josephson began work on a sequel called The Politicos, which described the politics of the Gilded Age. Like his research for The Robber Barons, Josephson mainly did quick reading of those secondary sources in sympathy with his ideas. His book was hastily written and riddled with errors and distortions. In fact, Josephson confessed to Charles Beard that “in spite of all my precautions there might be a good many historical inaccuracies in my book.” Beard retorted, “All works of history are inaccurate,” and he urged Josephson to publish his book anyway, which he did.
If Josephson’s research was so sloppy, and his interpretation so biased, how did his Robber Baron view come to prevail in the writing of U.S. history? First, Josephson published his book in 1934, in the dark days of the Great Depression. Progressive historians had begun to dominate the writing of history and they were eager to blame a new generation of robber barons for the collapse of the American economy. The Robber Barons was embraced by key Marxist historians, who influenced much of the historical profession after World War II.
In doing so, these historians overlooked the ruinous government interventions under Presidents Hoover and Roosevelt that helped spark the Great Depression and cause it to persist. Those harmful federal policies include the Federal Reserve’s untimely raising of interest rates, making it harder to borrow money; President Hoover’s blundering Farm Board; his signing of the Smoot-Hawley Tariff, the highest in U.S. history; and his disastrous Reconstruction Finance Corporation, which dispensed massive corporate bailouts to political entrepreneurs. Finally, Hoover muzzled investment by repealing the Mellon tax cuts and promoting a huge tax hike. These various interventions stifled market entrepreneurs and emboldened political entrepreneurs. But historians have neglected that part of the story.
A second reason for Josephson’s triumph is that The Robber Barons was embraced by key Marxist historians, who influenced much of the historical profession after World War II. Richard Hofstadter, for example, was a long-time professor at Columbia University. He twice won the Pulitzer Prize, he wrote best-selling history books, and he helped train a generation of prominent historians. Yet Hofstadter had joined the Young Communist League in college and later joined the Communist Party. “My fundamental reason for joining [the Communist Party],” Hofstadter said, “is that I don’t like capitalism and want to get rid of it.” Although Hofstadter soon quit the Communist Party, he maintained his hostility to capitalism and expressed it in Social Darwinism in American Thought, in The Age of Reform, and in a popular co-authored textbook, The United States: The History of a Republic.