The Laffer Curve and Farm Labor

The New York Times has discovered the Laffer Curve! Has the esteemed liberal newspaper of record been bought by Rupert Murdoch? Has hell frozen over as a result of global warming?

Not quite. Though the Times has implicitly recognized the logic of the Laffer Curve, it took more than the plight of hedge fund managers and dot com billionaires to merit their notice. The disincentive of a mere 15% tax was not news fit to print. When a Colorado farmer was unable to find local laborers willing to pick onions, despite high unemployment rates, however, the New York Times took notice.

Unemployment and labor shortage at the same time. Something seriously stupid is going on. This prompted an in depth debate. Tom Lutz gave a pretty good answer:

First let’s do some easier math: the Colorado farmer is offering 10 bucks an hour. Say you’re a 50-year-old agricultural manager earning in the 75th percentile, or making $90,000 a year, and you are one of the 6,000 such managers to lose their jobs this year (as predicted for that job category by the Bureau of Labor Statistics for the next decade). You are eligible for a maximum of $13,000 in unemployment benefits. Even though it is not much, it would pay a year’s major medical coverage for your family as you try to get back on your feet. You might not want to screw up those payments in order to earn $400 a week for a seven-week harvesting season. Unless of course, you got paid under the table. Does making such a calculation mean you have a bad work ethic? Obviously not.

Unemployment insurance is not free money. You have to stay unemployed to collect. If you are unemployed anyway, this is a sunk cost. But as the Times noted, there are jobs out there: they just don’t pay enough to risk losing government benefits. The effective marginal “tax” rate is way higher than 15% or even 35%. It can be greater than 100% for those down on their luck.

Make the government benefits unconditional, however, and seasonal work becomes worth doing. Environmentalists take note: if you want your local foods and free range meats, you need cheap farm labor. Demand a high wage and/or job security for farm workers and the masses will opt for factory-farmed badness or food grown in poorer countries — food grown on what used to be rain forest.

Free money for all gives us affordable farm labor with a better life for those who pick our tomatoes. Harvest work is brutal work, suitable for short bursts only. Using migrants to follow the harvest is inhumane. Far better to hire locals who don’t have steady jobs. But to make that happen, we need to replace our sticky safety net with a safety trampoline.

How Much Money are We Talking About?

If you want to get rich, you need to work for it, inherit it, marry it, beg for it or steal it. Big money is not lying around for free. Bummer. In fact, if we divide up all the receipts from 2008 federal budget and gave it out equally to adult citizens, each would get about $12,000/year. For a married couple this comes out to $24,000/year. Not exactly riches but not chump change either.

Interestingly enough, $12,000/year/adult is about the amount needed to eliminate poverty! That is, based on federal poverty guidelines $12,000/year is more than enough to take a single person above the poverty line and is almost enough for a married couple with three children to be above the poverty line without working. Give out this much free money and we can eliminate all welfare programs save those for the seriously ill and mentally incompetent. At this much lower level, it should be save to leave these responsibilities entirely up to the states. We could close down the entire federal social program apparatus.

But it looks like we would need to shut down the entire federal government at this level! We might want to keep the Defense Department, the Patent Office and some national parks. So maybe we need to look at a lesser number. Besides, the American People might want people to have to work to be out of poverty. If we use free money to bridge the gap between the minimum wage and a living wage, the amount drops to between $575/month and $875/month, which translates to $6900/year and $10,500/year. The lower figure leaves us 42% of the federal receipts to run the federal budget. This might be enough if we didn’t already have obligations to retirees…

Of course, our proposal to use free money to replace the federal welfare state means replacing both federal welfare programs and the progressive tax system. If we merge payroll taxes and the federal income tax into a deduction-free 30% super flat income tax, then we need a rebate of around $2600/adult to ensure no one gets a tax increase. We can probably turn that rebate into a prebate without impacting revenues significantly, especially if that prebate substitutes for other social programs including Social Security. That is if today’s social benefit is greater than $2600/year, then you get today’s benefit without the prebate. If today’s benefit is less, you get the $2600/year prebate. This provides a bridge between welfare and work, which is one of our major goals.

To afford a bigger amount of free money rebate/prebate, we might need either a higher marginal income tax rate, or a two-tiered tax. It is hard to say without more detailed study, since the rich make use of many loopholes which are beyond my knowledge. The flat income tax I propose includes treating capital gains as ordinary income, which would eliminate many of the most squirrely loopholes, and the tedious tax regulations meant to thwart them. However, many people object that treating capital gains as ordinary income would make the double-tax on corporate founders hideously high. The simple solution? Reduce the corporate rate to 20%.

So, what are we proposing here? The answer is time-dependent. Let us start by replacing our fiendishly complex tax system with the 30% flat tax with a prebate of around $300/month. This may cost or save the government money. It is hard to say without doing the experiment. The enormous simplification of the tax code should inspire more people to start businesses, and the universal stipend should provide enough of a bridge between welfare and work that many in the welfare class will consider employment. If the resulting improvements in the economy reduce the welfare budget and/or increase the tax receipts sufficiently, we might increase the citizen’s dividend. If not, we might need to consider some further adjustments to the tax rates. I’ll return to this subject in a future post.