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92 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0089 and id is 1 raw text is: Adviory November 2, 1999 No. 92 MINIMUM WAGE HIKE AND SMALL BUSINESS TAX RELIEF: THE BAD, THE GOOD, AND THE UGLY H.R. 3081 would boost the minimum wage by $1, from $5.15 to $6.15, or by nearly 20%, over three years. To help some of the small businesses that would be adversely affected by the higher minimum wage, modest small business tax relief (generally, a truncated version of some of the tax provisions in the recently vetoed tax bill) would be enacted. The hike in the minimum wage would cost tens of thousands of low skilled workers their jobs. The burden would fall heaviest on black male teenagers, whose unemployment rate has averaged over 30% in 1999. The higher labor costs would fall disproportionately on small businesses that employ many of the lowest wage workers. The tax relief being offered small business in compensation for the higher labor costs is welcome and worthwhile, but it is not as valuable as the small business relief in the vetoed tax bill, and it would not restore all the unskilled jobs lost to the minimum wage hike. Many of the affected workers will still be hurt, as would many small businesses. The tax relief would dampen the job impact only a bit. Small businesses would be able to increase investment, and there would be some productivity gains among even the unskilled that might save some of them from being fired. Nonetheless, businesses would still want to substitute higher skilled workers or machinery for many of the soon to be more costly unskilled labor. Small business tax relief provisions. H.R. 3081's five largest tax reductions are: * trimming the top estate tax rate and changing the credit to a true exemption (with a true exemption, the estate tax would begin at a marginal rate of 18%, instead of the current 37%); retirement pension reforms; accelerating by two years when the self-employed may claim full deductions for their health insurance purchases; - allowing small businesses to expense (i.e., deduct immediately) up to $30,000 of depreciable asset purchases, starting in 2000 (under current law, small businesses could expense up to $25,000 by 2003); and 0 increasing the business meals deduction, excluding entertainment, to 60% for small businesses (80% for persons subject to hours of service limitations). Additional expensing is a good idea, but it would still be a piddling sum and would still be phased out for large firms. In an ideal tax system, all investment would be expensed, not just these small amounts. The best help to small business in the bill is the estate tax relief (available to all estates, not just small businesses). As of 1999, a unified credit exempts from tax the first $650,000 of lifetime transfers (estates and gifts), effectively eliminating the estate tax brackets below 37% (see table). Under current law, the exempt amount will rise to $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1 million in 2006 and thereafter; it will not be adjusted for inflation. A surtax phases out the graduated rates and results in a flat 55% tax rate on large estates. Under the proposal, the unified credit would be replaced with an exemption that would ultimately rise to $1 million. The marginal rates would be lowered, and the phase-out of the graduated rates in Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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