A fail for the press editorial

February 27th, 2014 at 12:00 pm by David Farrar

says:

Cynics would say that the latest rise was an easy move for the Government to make. When the rises by 50c, the Inland Revenue Department gets nearly 9c extra for every hour worked by a minimum- wage earner as the income tax liability increases. For workers with children, the Government’s Working for Families liability will decrease at the same time. All of this money will be funded by employers directly, and indirectly by the consumers who use the goods and services that those employers provide.

A number of people make this mistake. Putting up the minimum wage decreases the tax take for the Government. They have ignored the fact companies pay tax, and at a higher rate than individuals on the minimum wage.

A full time minimum wage of $13.75 an hour is $28,679 a year. Going to $14.25 an hour is $29,721. An increase of $1,042.

Tax on the former is $4,039 and the latter is $4,221. So an increase in tax of $189.

However the employer pays tax at 28%. Their profit will drop by $1,042 and hence the tax they pay drops by $292. That means a net reduction in tax to the Government of $103.

So a rather big fail for The Press editorial.

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25 Responses to “A fail for the press editorial”

  1. freethinker (688 comments) says:

    Not surprising really as the ChCh Press has declined significantly in both content & accuracy over the last few years further evidence by the number of spelling and grammatical errors evident which perhaps indicates the reporters have a poor grasp of English or the sub editing is done in Nigeria.

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  2. dime (9,806 comments) says:

    Your expectations are higher than mine DPF.

    These people are hacks.

    They scrape through 6th form or whatever its called, go to a tech and do some shitty diploma taught by some marxist loser and then become “journalists”.

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  3. tas (610 comments) says:

    No you misunderstand. Raising the minimum wage stimulates the economy. Workers earn more and spend more, stimulating the economy and increasing tax take. Profits by evil corporations are unproductive — corporate profits are wasted on such frivolous things as investment.

    Economic growth is easy to achieve: governments can make everyone richer by raising the minimum wage. Who needs to futz around upskilling, educating, and investing. Just raise the minimum wage and even the lowest-skilled worker can earn as much as a IT specialist.

    </sarcasm>

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  4. user123 (2 comments) says:

    > However the employer pays tax at 28%. Their profit will drop by $1,042 and hence the tax they pay drops by $292. That means a net reduction in tax to the Government of $103.

    What if the employing company makes a net loss, before or after the wage increase?

    [DPF: Still the same as they build up a tax credit against future profits]

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  5. Adolf Fiinkensein (2,880 comments) says:

    They are journos, for whom the pen is mightier than the brain.

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  6. ross69 (3,652 comments) says:

    So a rather big fail for The Press editorial.

    Actually, a big fail for you. What will workers do with the extra $1042 (less tax)? They will spend it, which means that revenue from GST will rise as will profits.

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  7. Than (450 comments) says:

    This assumes the business simply absorbs the cost of the minimum wage increase. If they can pass on even half of it their profit only drops by $521, their tax drops by $146, and the government is better off by $43.

    The Press is over-simplifying, but so is DPF.

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  8. ross69 (3,652 comments) says:

    Moreover, isn’t it the Right’s argument that more pay equals more productivity? So, there’s no reason to believe that profit will fall by $1042…

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  9. berend (1,699 comments) says:

    @Than: good points, so Countdown has to pay their staff more, so they increase the price of food, so those minimum wage earners now pay more for their food, and might even be worse off!

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  10. tas (610 comments) says:

    ross69: That’s a stupid strawman. No one believes that paying someone more will magically make them more productive. Increased pay needs to be linked to increased productivity. There’s a difference between “I will give you a 10% raise” and “I will give you a 10% raise, if you increase productivity by 10%.”

    Also: Yes, minimum wage workers will spend more money. But businesses will also spend less money. Unless you think poor people are taxed more than rich people and businesses, your argument doesn’t hold water

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  11. meanybeany (27 comments) says:

    Raising the minimum wage will decrease unemployment and boost economic activity in the medium to long term. . . even if has a negative short term impact. The governments tax take will evenually benefit.

    The low paid have a high marginal propensity to consume – so they will spend nearly every extra dollar earned, thereby increasing consumption, production and employment. The more wealthy you are, the lower your propensity to spend. You are more likely to hoard the cash.

    The world is awash with cash at present – there is an excess of supply over demand for cash that people are willing to invest vs people willing to borrow and invest in productive capacity – which is why interest rates are so low – effectively negative if you take into account the impact of QE. So. . . giving more to the wealthy would leave most of that cash sitting around barely earning any interest and not adding to the economy in any productive way. This also explains why income inequality is, in itself, harmful to the economy.

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  12. KiwiGreg (3,247 comments) says:

    “Moreover, isn’t it the Right’s argument that more pay equals more productivity?”

    No one rationally argues that. Higher pay comes from higher productivity not the other way around.

    “Raising the minimum wage will decrease unemployment… ”

    Other way around.

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  13. tas (610 comments) says:

    meanybeany:

    Raising the minimum wage will decrease unemployment and boost economic activity

    Raising the minimum wage increases unemployment. If you make it more expensive to hire someone, then employers are less likely to do it — employers aren’t made of money.

    The low paid have a high marginal propensity to consume

    What evidence do you have for that? No one ‘hoards cash’. You either spend it or invest it. Both are good for the economy. The less Kiwis invest the more foreign investment we need to make up the shortfall. I don’t have a problem with that, but the left does.

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  14. Alan (1,087 comments) says:

    The correct answer is, “it’s complicated”

    DPFs maths are as bad as those of the press, as he appears to make the assumption that the pay rise money disappears under the bed when paid, is never spent and leaves the economy forever.

    This obviously isn’t true, so it’s as big a “fail” as the press. The taxation numbers also fail to take into account dividends and the difference between public and private sector organisations.

    It’s hard to be sure, but in all probability the effect is to reduce savings and increase consumption, as it’s a wealth transfer from well off who tend to save towards less well off who are unable to do so.

    In tax terms it’s probably zero sum or as close as makes no difference.

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  15. ben (2,420 comments) says:

    DPF is right to point this out but the system is a bit more dynamic: a change in labour input costs will move output prices, affect employment decisions, encourage substitution to capital, and affect entry and exit decisions. I would not be surprised if a general finding is that minimum wage does reduce tax (from the principle that binding exogenous constraints force second best decision making) but have not seen that argument made anywhere.

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  16. labrator (1,898 comments) says:

    I’ve had this discussion before with Green party supporters. If raising the minimum wage is so wonderful for the Government and the employee, why not go for $100 an hour? Or $1000? The Green party supporter then typically, looks up and to the left, asking their memory for the preprogrammed response to such a question. Then they look up and to the right to try and rationalise why they haven’t thought of that before, then they stammer “argh, urgh, well…”. People like than and ross69 then explain how continuous motion machines work and how all we need is Russell Norman printing more money so we can infinitely increase the minimum wage, destroy poverty and all live happily ever after. Don’t mention inflation to them though as NZ is nothing like Zimbabwe and that could never happen here.

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  17. Duxton (633 comments) says:

    ross60: “Actually, a big fail for you. What will workers do with the extra $1042 (less tax)? They will spend it, which means that revenue from GST will rise as will profits.”

    Well, I’ll be! People having more money to spend will mean more GST and higher profits!

    How truly TERRIBLE! Why isn’t anyone thinking of the children!

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  18. srylands (404 comments) says:

    “the low paid have a high marginal propensity to consume”

    You get that argument at The Standard all the time.

    Yes the poor do have a higher propensity to consume. But the economy doesn’t need more spending at The Warehouse and at KFC. We need higher savings and investment.

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  19. ben (2,420 comments) says:

    Alan wrote:

    as it’s a wealth transfer from well off who tend to save towards less well off who are unable to do so.

    Would be surprised if minimum wage does result in a net transfer to those less well off, after employment effects and taking account of all those students living upmarket with mum and dad. Youth unemployment is very high and this can be plausibly attributed to minimum wage.

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  20. meanybeany (27 comments) says:

    Tas:

    What evidence do you have for that?

    Economics 101. . . show me one economist who disagrees

    No one ‘hoards cash’. You either spend it or invest it.

    What if there is more cash available than there is people willing to borrow it? That’s exactly what is happening now (admittedly, not so much in New Zealand, but certainly in most of the OECD). Hence the negative interest rates. Cash just sitting around (36 Trillion of it in various tax havens around the world) not doing anything productive.

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  21. wiseowl (861 comments) says:

    The CEO of the Hawkes Bay Regional Council Investment arm has had a 29% increase that takes him to just under $400k pa.
    Will his productivity increase.?Will he spend more? Yes he will pay more tax but then his pay is derived from ratepayers ,a captured market.

    Obscene!

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  22. DJP6-25 (1,362 comments) says:

    freethinker 12.07 pm. You’re right. I’ve bought about six copies in the last four years. I only read it online when there is a link from here, or Whale oil.

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  23. Poliwatch (335 comments) says:

    Perhaps DPF the Press is silently advocating your Living Tax idea. :-) Becuase if they paid tax on their revenue then they would not get an offset for the extra expense. In fact some on the minimum wage would now use the extra to buy a paper, pushing up the Press’s revenue and therefore their tax bill and the government revenue. Just saying …

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  24. ross69 (3,652 comments) says:

    Higher pay comes from higher productivity not the other way around.

    That’s false and you know it. Productivity in NZ has increased by more than 80% since 1982, yet real wages have fallen by 25%. Businesses have been creaming it at workers’ expense.

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  25. ross69 (3,652 comments) says:

    Yes, minimum wage workers will spend more money. But businesses will also spend less money. Unless you think poor people are taxed more than rich people and businesses, your argument doesn’t hold water.

    Businesses are spending the same amount (at least according to DPF), but instead of buying the latest overseas imported Mercedes or going to Europe for a holiday – both of which incur no GST and are not beneficial to the local economy – business owners are paying workers more which will be spent locally. So raising the minimum wage is ultimately beneficial to the economy.

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