There’s another side to the wages debate we didn’t examine last week. We outlined we can’t support policies that allow some businesses to pay unsustainable wages while simultaneously opposing social programs designed to mitigate the consequences of low incomes. But it’s a complex dilemma, and that statement only captures part of the muddle.
Let’s consider another aspect. If businesses don't increase revenue, they can't raise wages.
The Philosophy of Wages
Three weeks ago, we learned about John Stuart Mill in the piece, On Liberty. Mill (1806-1873) was a philosopher known for his writings on logic, economics, and ethics. He was the most influential English language philosopher of the nineteenth century, and his philosophical work laid the groundwork for the way we now think about personal freedom and liberty.
Mill was not only a brilliant philosopher. He was also a luminary economist. He promoted fairness and the welfare of workers, supported cooperative movements and women’s rights, and believed in social justice. Mill provided a theoretical framework that continues to influence contemporary economic thought.
His treatise Principles of Political Economy (1848) is considered one of the most important works in the history of economics. Just as Mill outlined that individual liberty is essential for a just and progressive society, he refined existing theories of economic production, distribution, and exchange. He integrated economic theory with broad social themes, arguing for economic policies that considered the welfare of cultures. His basis of an economic framework that considered social and ethical factors was revolutionary in his time.
Mill's most important contribution to economics was his theory of the wage fund. He analyzed the impact of economic growth, productivity, and capital availability on wages. He tied wages conceptually to revenue, aligning both with broader economic activity.
Let’s take a minute to gain a common understanding of wages. Businesses generate revenue through the sale of goods or services. Business leaders use part of this revenue to pay wages, but wages aren’t the only expenditure. Businesses have to build and maintain infrastructure, including physical facilities and technological systems they use to operate. They have to pay taxes. They need to make their product and expend revenue to generate raw materials, manufacturing, and logistics. They have to conduct research and development to improve their offerings.
A business's ability to maintain healthy wage levels depends on revenue being high enough to support their other costs. In lean years, wages that are too high threaten financial stability. This can lead to a business failing to invest in infrastructure to modernize and compete with new businesses. It could cause a loss of talent due to wage freezes, reductions, or layoffs. It could reduce the ability to move into new markets, slowing growth and strangling the business. Every time a business fails to achieve one of these marks, one of its competitors does. If it misses too many, it dies.
Due to this constraint that high wages threaten business growth and survival in lean years, one principle business leaders consider is their payroll-to-revenue ratio. For many businesses, a good guideline is 15-30%. In fat years, wages may only be 15% of revenue. In lean years, wages could be 30% or more.
In the long run, businesses can only afford to raise wages if they can increase their revenue. If the business needs to raise wages by 10%, it needs to grow revenue so the payroll-to-revenue ratio is still in a healthy range.
Mill's theory of the wage fund was a simplified model of how wages are determined. In Principles of Political Economy, he outlined wage levels and the impacts of economic factors such as population and capital. Mill’s wage fund concept suggested that at any given time, there is a fixed amount of capital available to pay wages. This fund is influenced by the total revenue and the number of workers available, meaning wages are determined by the division of this fund among the workforce. In Mill’s theory, all the workers were paid the same.
While Mill's theory is no longer accepted in its original form, it is still helpful to understand how wages are determined. Businesses don’t generate the same revenue every year, and there’s no fixed fund for wages. Some workers make more than others. As noted, businesses now think of the payroll-to-revenue ratio, not a fixed fund.
Mill revised his economic theory to a more flexible understanding of capital and wages. But Mill’s theory that wages are a component of revenue and a critical component of business viability survived even in its original form.
This theory explains why raising the minimum wage to a federal family-supporting livable wage level is politically divisive. Raising the minimum wage so it’s functional for families in high cost of living areas threatens some businesses and weakens others.
If businesses don't increase revenue, they can't raise wages.
The Wages Dilemma
Let’s reiterate the dilemma that’s been building for the last two months.
Americans need to be able to prosper. This aspect of our dilemma is non-negotiable. No matter what actions we take, if American individuals and families can’t prosper, we have failed. A component of prosperity is livable income.
We can’t support policies that allow some businesses to pay unsustainable wages while simultaneously opposing social programs designed to mitigate the consequences of low incomes. We have to either support higher wages or support social programs.
Funneling American taxpayer dollars through the government to aid needy Americans leads to significant administrative overhead costs, diminishing the funds actually reaching those in need. For instance, administrative costs account for approximately 30% of total expenditures within private healthcare companies. In the military, bureaucratic expenses consume 70% of allocated funds due to extensive logistical and support structures. Based on these examples, we will assume that government bureaucracy absorbs 40% of the funds intended for social programs. More than one layer of bureaucracy, i.e., money that passes through both federal and state levels, cuts taxpayer dollars even more. These government functions aren’t inherently evil. They have familiar names, like Human Resources (HR), finance, building and grounds maintenance, and logistics.
If businesses don't increase revenue, they can't raise wages. Taking across-the-board action, such as raising the minimum wage to a federal standard for all areas, threatens business vigor and viability. As a result, this approach is politically untenable.
All combined, it’s a tough problem.
It’s easiest to politically avoid the problem and hide the real cost of sustainable wages in the federal deficit. This avoidance gives rise to social programs. That’s why half of American families with children receive benefits from social programs, and 99 million Americans receive social program benefits.
We aren’t going to avoid the problem, though. Let’s transition to a mental exercise to think about how we could approach a solution.
A Mental Exercise
Nicholas: Hi, I’m Nicholas. I’m a 37-year-old married parent of three daughters. I work full-time, and my wife works part-time to support our childcare needs. We file our taxes jointly. All combined, we will make $60,000 this year.
Nicholas and his family qualify for a social program called the Earned Income Tax Credit (EITC). EITC is designed to benefit low—to moderate-income working individuals and families, particularly those with children. It aims to reduce poverty, incentivize work, stimulate the economy, and reduce income inequality.
President Ford (R) signed the program into law in 1975. President Reagan (R), President George HW Bush (R), and President Clinton (D) significantly expanded it. President Reagan (R) said EITC was “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”
Since Nicholas and his wife have three daughters, file their taxes jointly, and make less than the threshold of $66,819 for 2024, they will qualify to get taxpayer social program benefits in the amount of $6,819 this year when they file their taxes.
Now for a tough question: How much does it cost the American taxpayer to give $6,819 to Nicholas and his family? Assuming the factor we mentioned earlier, that bureaucracy absorbs 40% of funds, this $6,819 is 60% of the total. The government absorbs the other 40%, or $4,546.
Adding the sums together results in…a cost to America of $11,365 to give Nicholas and his family $6,819.
There are approximately 84 million families in America. Of these, 42 million, or half, get social program dollars. Many of these Americans don’t even know they get social program support because it’s hidden in their tax filing and hidden again in this year’s federal deficit.
Assuming these 42 million families all got a similar benefit, $11,365 multiplied across those families totals $477,330,000,000 of the federal deficit. Almost a half trillion dollars a year.
A Proposed Solution
Is there a path around this problem? Yes.
There are only two sources for an American worker to get money. One is the government, which represents funneling the American people’s money through bureaucracy. We just covered how efficient this approach is.
The other is their work. But government livable wage mandates threaten business vigor and viability, making this approach politically untenable. Since raising the minimum wage to a family-supporting livable wage isn’t going to politically work, we have to reorient our perspective and approach the problem with new eyes.
Let’s also remember that to raise wages, businesses need to grow revenue.
So how would we grow business revenue, allowing us at the same time to mandate higher wages? Where would this additional revenue come from?
Let’s go back to our common understanding of wages. Businesses generate revenue through the sale of goods or services. Business leaders use part of this revenue to pay wages, but wages aren’t the only expenditure.
Businesses have to pay taxes. Make a mental note to remember that.
Also, systemic problems require systemic solutions. There’s no silver bullet that will solve the problem. We need to take more than one approach.
The Earned Income Tax Credit table for 2024 shows that the minimum wage for a married worker claiming no children to be above the social program threshold is $12.27 per hour. The figure is based on the EITC-threshold $25,511 income divided across 2080 hours or a 40-hour week for 52 weeks. For a married worker claiming one child, that minimum wage rises to $26.93. Married with two children is $30.14. Married with three children is $32.13.
These figures make sense because if someone is married but claims no children, both Americans can work. $12.27 an hour multiplied by two people is $24.54 an hour combined. That’s what a living wage is.
One child means one of the parents needs to be at home, or if not at home, they have to pay for childcare, which costs one entire income. A second child costs more, but not much more than the first, and a third child costs a little less than the second.
It’s pretty obvious that the minimum wage must be at least $12.27 per hour. There is no better definition of ‘minimum’ than a rate ensuring that if someone works, the American taxpayer doesn’t have to subsidize wages through government assistance. This minimum wage means that, at a minimum, it supports an individual to stand independently. I have no sympathy for businesses that offer poverty wages and let the American taxpayer pick up the tab.
Now we arrive at our dilemma.
How do we cover the difference between $12.27 an hour and $26.93 an hour when the family chooses to have children? America needs to grow. Just as a shrinking business is a dying business, a shrinking nation is a dying nation. So we need to incentivize young Americans to have children.
We also need to generate business revenue to raise wages.
If we refuse to help businesses generate this revenue, 42 million American families will receive social program benefits, which will cost the nation almost a half trillion dollars a year.
The Proposal
We need to reduce the tax burden for small businesses that pay wages sufficient to keep Americans off social programs by 10% across the board and target specific industries with even more significant tax breaks. Businesses need to prove in their annual taxes they paid wages above social program levels to qualify. This approach would help businesses generate the revenue to pay wages sufficient to enable workers to provide for themselves and reduce the national need for poverty programs.
We might need a more significant tax credit for certain sectors, such as retail and food service businesses. These businesses might need a 25% tax break to incentivize paying higher wages. We need to phase in the tax credit over time. This design would give businesses more time to adjust to the higher cost of paying livable wages.
With this approach, less social program dollars get funneled through the government, reducing waste.
Worker wages go up.
Businesses keep more of their revenue, so they can pay higher wages.
I’m personally having a hard time finding a downside.
Views of Others
Some will say this is just a subsidy for businesses instead of individuals. This proposal is different from a trickle-down approach. It saves the American taxpayer half a trillion dollars a year that don’t get funneled through government bureaucracy. And for a business to get the money, the dollars have to actually get to the workers.
Some will say that instead of giving businesses tax cuts, we should raise the minimum wage across the board to a livable wage. That becomes a complex political issue that ends up in gridlock. This gridlock means nothing is done and Americans don’t have the money they need to live without social program support. Trying to raise the minimum wage to a functional level keeps 42 million American families on welfare programs.
Some will say it’s not enough incentive for the business, and the 10% tax break doesn’t cover the entire cost of the wage difference. That will be true for some businesses. But it’s part of a systemic solution. It will make some businesses more competitive, and other businesses will copy them so they can also be more competitive. We don’t need a social program to support all businesses. We need a program to make businesses compete for the benefit of the American worker.
Some will say the taxpayer shouldn’t support the workers at all. They should gain skills to justify raising their own wages. The premise of this argument is short-sided. When people have to work multiple full-time jobs to put food on the table, they don’t have time to improve their skills. This cycle just keeps 42 million American families on welfare programs.
We need to incentivize businesses to pay higher wages.
If businesses don't increase revenue, they can't raise wages.
To achieve our goal, we need to help businesses grow revenue. Without higher revenue, mandated wage hikes threaten business survival.
We need businesses to pass this expanded revenue on to their workers.
To achieve our goal, we need to reduce the tax burden for small businesses that pay wages sufficient to keep Americans off social programs by 10% across the board and target specific industries with even more significant tax breaks. To qualify, businesses need to prove in their annual taxes they paid wages above social program levels. For a business to get the money, the dollars have to actually get to the workers.
May God bless the United States of America.
If Businesses Don't Increase Revenue, They Can't Raise Wages