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Tackling income inequality through the minimum wage alone is an inadequate way to counter the economy’s anti-egalitarian tendencies. The minimum wage exists because the federal government recognizes the economy undervalues the average worker’s contribution and fails to provide a fair livable wage. Conversely, the economy’s overvaluing a few people’s contribution is also in need of governmental oversight. Since the government believes the economy is not a reliable gauge for determining how little is too little, it cannot assume the “market” is capable of determining how much is too much. Given this it is incumbent on the federal government to implement an income ceiling to eliminate the extreme income disparity between top and average wage earners.
Before dismissing the maximum wage idea outright, consider President Franklin Delano Roosevelt’s call for 1942 maximum wage of $25,000 a year (in 2012 dollars $364,000) as a means to fuel economic growth and reduce income inequality. In a recent Le Monde Diplomatique article Sam Pizzigati of the Institute for Policy Studies revealed that two short years after President Roosevelt’s proposal, Congress increased the top tax rate to 94% for individual incomes over $200,000 (in 2012 dollars $2.6 million) The 94¢ tax on every dollar over $200,000 limit help initiate the longest period of economic growth for the middle class in U.S. history. This tax rate remained in place until President Lyndon Johnson dropped it to under 70% in the late 1960s. About two decades later President Reagan reduced the rate to 50% and then to 28% in 1988 before it settled at today’s 35% rate. But this tax rate overstates the rich’s tax burden given that most of their income comes from 15% capital gains tax on profits acquired from buying and selling stocks, bonds and assets. This tax rate is about the same as that for working Americans earning between $50,000 and $75,000 before itemized deductions and exemptions.
Opponents of the maximum wage assert that cutting the top tax rates rather than increasing them will spark revenue and job growth. Their “trickle down” rationale assumes that making the rich richer will create good paying jobs, making working people more prosperous. But the trickle down approach and other piecemeal provisions like the minimum wage, earned income tax credit, and other minimalist economic programs and policies have proven ineffective in reversing the growth in income inequality over the last four decades. The ineffectiveness of such programs and policies is apparent in Emmanuel Saez’s recently released study showing that during the current recession one-percenters captured 93 percent of the income growth in both 2009 and 2010. In real dollar terms this means that the bottom 90% income on average declined $127 while the top 1% income increased $106,000.
One of the most proficient ways to restart job growth and alleviate poverty and inequality is to impose a maximum allowable wage tied to minimum wage and enforced through a progressive income tax. The maximum is set at a specific multiple (maybe twenty five times) of the minimum wage, so that all income over the multiple limit is subject to a 95% to 100% tax. Limiting and linking average and top wages earners in this way will help Americans clearly see that poverty and suffering is necessary for an individual to accumulate wealth.
The fact is that income and wealth inequality impedes economic recovery, and efficiency and stability because it weakens demand for goods and services. By implementing a maximum wage the government could generate billions in revenue that can be invested in health, education, technology and infrastructure maintenance in ways that ensure the economy is sustainable, productive and efficient.
Europeans, especially those dealing with economic austerity measures, are already debating how to enact a maximum wage policy to ameliorate economic calamity. The idea of the maximum wage is also starting to resonate in the United States with a public that is increasingly aware of the destructive and anti-democratic consequences of lopsided disparities in income and wealth. This emerging awareness encourage people to question and challenge the legitimacy of economic values and a political system that, as Martin Luther King, Jr. put it: “permit necessities to be taken from the many to give luxuries to the few.”
Johnny E. Williams is an Associate Professor in the Department of Sociology at Trinity College.