Economic Stupidity

Neil Reid at Sunday News reports:

RAISING the minimum wage would boost the economy and Government’s piggy bank, plus keep Kiwis from moving across the Tasman.

That’s the message Green Party co-leader Metiria Turei has for Finance Minister Bill English ahead of Thursday’s 2011-12 Budget.

Turei wants the minimum wage lifted by $2 an hour from the current $13.

“Raising the minimum wage to $15 an hour would not only significantly improve their lives at a time when living costs are soaring, it would also generate up to $173 million per year for the Government at a time when the fiscal deficit is ballooning,” Turei told Sunday News.

The rise would immediately generate an extra $101m a year in increased PAYE taxes, she said. It would give 300,000 workers increased spending power, leading to a gain of about $72m annually from GST.

This argument is so economically illiterate, I don’t know where to start.

First of all if PAYE taxes  go up $101m a year, then the company tax will drop by more than that. Let’s say those 300,000 workers are around 150,000 full time equivalents. If their pay goes up from $13/hr to $15/hr, they will gain $4,160 each before tax, or $624m in total.

At 17.5%, this will lead to an increased PAYE tax take of $109m – close to the $101m quoted.

But the employers will have had their profits drop by $624m, and they pay 30% tax on that. So that is $187m less tax paid in company tax.

So Turei’s argument is just nonsense. She has deliberately ignored the impact on company tax.

Beyond the direct fiscal costs, there are also flow on effects such as job losses. Youth unemployment would continue to skyrocket if you made it illegal to hire a 16 year old for less than $15 an hour.