Better Than

Even Better Than a Tax Cut 

By LAWRENCE MISHEL

WITH the early stages of the 2016 presidential campaign underway and millions of Americans still hurting financially, both parties are looking for ways to address wage stagnation. That’s the good news. The bad news is that both parties are offering tax cuts as a solution. What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate.

Wage stagnation is a decades-long phenomenon. Between 1979 and 2014, while the gross domestic product grew 150 percent and productivity grew 75 percent, the inflation-adjusted hourly wage of the median worker rose just 5.6 percent — less than 0.2 percent a year. And since 2002, the bottom 80 percent of wage earners, including both male and female college graduates, have actually seen their wages stagnate or fall.

At the same time, taxation does not explain why middle-income families are having a harder time making ends meet, even as they increase their education and become ever more productive. 

According to the latest Congressional Budget Office data, the middle 60 percent of families paid just 3.2 percent of their income in federal income taxes in 2011, less than half what they paid in 1979.

Yes, a one-time reduction in taxes through, say, expanded child care credits or a secondary earner tax break, as Democrats propose, could help families. But as wages continue to stagnate, it is impossible to continuously cut taxes and still pay for things like education and social programs for the growing population of older Americans.

Republican tax proposals, like the reforms put forward by Representative Paul D. Ryan of Wisconsin, focus on lowering individual and corporate tax rates alongside revenue-saving efforts to simplify the tax code. But this same approach has been tried for decades — the same decades in which wages have continued to stagnate. Instead, these cuts have helped corporations, shareholders and the top 1 percent capture a larger share of economic growth.

Similarly, President George W. Bush’s 2001 and 2003 tax cuts, which likewise promised to increase middle-class income, were followed by slower productivity and wage stagnation. The latest proposed Republican cuts won’t even provide much short-term relief, as they tend to be targeted at the highest-income households. For example, under a much-touted proposal by Representative Dave Camp of Michigan, the middle fifth would gain just $279 in tax relief a year, according to the Tax Policy Center, while the top 0.1 percent would garner the largest rate cut, valued at $248,000.

Obtaining better economic growth, another goal of these cuts, is certainly worthwhile, but it establishes only the potential for broad-based wage growth — it’s no guarantee. Again, we have seen plenty of growth since 1979, but this expansion has not “trickled down” to middle-wage workers.

The challenge is to ensure that a typical worker’s wages grow along with profits and productivity. There is no silver bullet, but the key is to make raising wages the central focus of economic policy making and to reverse decades of decisions that have undercut wage growth.

We need to start with monetary policy. In the next few years, the most important decisions being made about wages are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates — and thereby slows job growth. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual wage growth. This will ensure that wage growth matches productivity growth and that everyone can benefit from the rebounding economy.Another short- to medium-term policy decision affecting wage growth is to avoid trade deals, such as the proposed Trans-Pacific Partnership, that would further erode Americans’ wages and send jobs overseas.

And there are several things we can do to bolster the labor standards and institutions that support wage growth. Raising the minimum wage to $12.50 an hour by 2020 would ensure that the minimum wage equals more than half the average wage, as it did in the late 1960s. And it has been too long since we have raised the salary threshold for overtime pay; raising it to $50,000, so that anyone making below that would get overtime, would move us closer to what prevailed in the 1970s, when about two-thirds of salaried workers received overtime pay.

Protecting and expanding workers’ right to unionize and bargain collectively is also essential; the erosion of collective bargaining is the single largest factor suppressing wage growth for middle-wage workers over the last few decades. And we need to modernize our New Deal-era labor standards to include earned sick leave and paid family leave so workers can balance work and family.

Finally, stronger laws and enforcement to deter and remedy wage theft and the illegal treatment of employees as independent contractors could put tens of billions of dollars into workers’ pockets.

Contrary to conventional wisdom, wage stagnation is not a result of forces beyond our control. It is a result of a policy regime that has undercut the individual and collective bargaining power of most workers. Because wage stagnation was caused by policy, it can be reversed by policy, too.