Commentary

Corporate ‘Freeloader’ Fee Wouldn’t Help Low-Wage Workers, Could Eliminate Their Jobs

Charles Hughes
By Charles Hughes | May 24, 2018 | 11:55 AM EDT

Walmart (Screenshot)

At the recent 2018 Ideas Conference hosted by the Center for American Progress, Senator Sherrod Brown (D-OH) called attention to his earlier proposal for a Corporate Freeloader Fee. In his remarks, Senator Brown explained “it’s simple – if you choose to pay your workers so little that they are disproportionately forced onto government assistance, then you need to reimburse American taxpayers. This will save taxpayers money, and give companies an added incentive to invest in … human capital.”

If it were to ever actually be implemented, the plan would be anything but simple. Few low-wage workers would benefit and in aggregate the implementation might in fact make them worse off. Instead of focusing on impractical or misguided policy proposals that have a catchy name, policymakers should instead look to increase the number of opportunities available in the labor market and a strong economy which would lead to more people working at higher wages.

The fee would affect companies with at least $100,000 in payroll taxes for 180 days in the last year, so would target larger firms.

The fee would be based on the share of an employee’s workers with earnings below 200 percent of the federal poverty guidelines for an individual person, which is $24,280 for 2018.

For employees with a quarter or less of their workforce earning below this threshold, the fee would be 0.25 percent of total payroll, up to 1 percent of total payroll for employers with greater than 75 percent of workers below this threshold.

We’ll use Walmart, one of the examples of large companies that employ many workers at the lower end of the wage spectrum. In January of this year, Walmart announced that it would increase its starting hourly wage to $11, and provide full-time hourly associates in the U.S. with 10 weeks of paid maternity leave and six weeks of paid parental leave, among other provisions.

Under the Corporate Freeloader Fee, even this would not be enough to save the company from being subject to the tax. Walmart could attempt to reduce exposure by using fewer workers at higher wages, shifting more resources from labor to capital to reduce total payrolls. In the situation where a company determines that paying the fee makes the most economic sense, those revenues flow to the federal government, instead of the low-wage workers the proposal says it wants to help.

In the same speech, Senator Brown decries the practice of some large companies outsourcing some services such as security and custodial work to other companies. This would be one of the mechanisms companies would employ to avoid the fee. Outsourcing would be especially attractive due to the nature of the fee, which would only affect large employers.

Firms would also be discouraged from expanding or increasing their hiring of low-wage workers if it would mean getting large enough to become subject to the fee, or crossing one of the established thresholds that would add significantly to the fee’s burden.

If Walmart finds the only way to get under one of the fee’s thresholds, or to minimize its exposure to the fee more broadly, is to outsource more functions to outside contractors, those people who now work at the outsourced company would no longer have access to the higher wages and benefits recently offered by Walmart, and would likely be in a worse position overall.

If the animating factor for Senator Brown is the taxpayer, and not the worker, the fee might also be counterproductive along that channel. Some programs, such as the Earned Income Tax Credit, which Senator Brown lauds in the same panel, do increase the labor supply of participants as the credit they receive while working boosts their take-home pay, making them willing to work at jobs at wages lower than would otherwise be the case. This is generally regarded as a positive development as it increases employment and reduces poverty among eligible workers, even if about a fifth to a quarter of the net benefits do accrue to employers, although it is less than half of the increase in after-tax income for workers. Even so, it does not follow that taxpayers are done a disservice by companies hiring a large number of low-wage workers.

The panoply of government safety net programs that support low-income people would have much larger outlays if more of those people were without work. A person working a job paying $11 per hour that also qualifies for a $100 of SNAP benefits each year requires far less government support than a person who does not work at all, and receives benefits from a multitude of programs running to thousands of dollars each year.

Furthermore, the former person has a much more immediate, plausible path to eventually improve their position to the point they no longer receive benefits at all, whereas the prospects for the latter person are much bleaker.   

A “Corporate Freeloader Fee” is misguided, and would dissuade large employers from creating more opportunities for low-wage workers, incentivizing them to outsource more functions. By worsening prospects for some low-wage workers and increasing the number without any form of employment, total taxpayer outlays going to support these people would actually increase over the status quo. Facilitating a strong labor market and robust economic growth is a better recipe for helping low-wage workers. 

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.

Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.

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