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July 1996
Volume 14, Number 7

Why the Working Poor Suffer
Ralph Reiland

"Forget the minimum wage," says Nate, a dishwasher and cook's helper at our restaurant. "It's taxes that are killing me." He is a college student by day, washes about 1,000 dishes during the dinner rush, and stuffs and rolls grape leaves until midnight.

To retain his services, we pay higher than the minimum wage. Nate makes $6.50 per hour and is proud of what his hard work buys. Aside from college textbooks, he drives an '88 white Dodge Daytona, eats out at Bellisario's Pizza Palace and the South Hills Village food court, plays some golf, and has a $30 Silver Arowana splashing around in his tropical fish tank.

If he works full time, 40 hours a week for 52 weeks, the government grabs $2,889 out of his $13,520 paycheck, a hefty 21% tax rate. The federal bite is $2,103--$1,069 in income taxes and $1,034 for Social Security and Medicare that he says he'll never receive. Then Pennsylvania snatches $379 in income taxes and $18 for an unemployment tax. Finally, the city of Pittsburgh takes another $369 in income taxes before Nate sees a dime.

On top of the 21% deducted from his paycheck on a $6.50 wage, Nate pays a 7% sales tax on almost everything he buys, a 6% state sales tax and a new 1% Regional Assets District Tax that is channeled to subsidies for the zoo and opera house. That's another $600 in annual taxes.

When he fills up his Daytona at Dom's Gulf across the street from the restaurant, he pays 42.98 cents per gallon in taxes--18.4 cents per gallon in federal gas taxes and the rest goes to Pennsylvania. That's another $400 a year if he fills up once a week, and the governor's seeking an additional 6.5 cents per gallon for unrepaired potholes.

When he pays his rent, Nate is hit for his fair share of the escalating real estate taxes that are funneled into Pittsburgh's public schools. Another rent hike is on the horizon, with the Pittsburgh School Board spending $9,000 per student--$270,000 for a class of 30 kids--and currently running $31 million a year in the red.

The government is in Nate's pocket every time he has a beer, attends a concert, or smokes a cigarette. Excise taxes, federal and state, add $6.60 to every carton of cigarettes, and then, as a tax upon a tax, a 7% sales tax is added to the higher retail price. That's another $300 in taxes if he smokes a pack a day. If Nate buys some beer, the federal government grabs another 80 cents per six-pack in excise taxes. To purchase a $30 concert ticket, he pays 7% in sales tax plus a 5% amusement tax.

By the time it's all over, government takes more than 30% of Nate's pay of 6.50 per hour. The bottom line is that he's washing about 90,000 dishes from January until May for no pay. If any business owner made a kid wash dishes for four months for nothing, Labor Secretary Robert Reich would fly into a rage and Janet Reno would be gassing up the tanks. Ironically, the politicians who keep piling the taxes on people like Nate paint themselves as compassionate.

The story isn't much different for someone earning the minimum wage in Pittsburgh. On an annual full-time wage of $8,840 for 40 hours a week for 52 weeks, a minimum wage employee has to kick in $1,524 in payroll taxes, a 17% rate that comes right off the top: $335 in federal income taxes, $676 for Social Security and Medicare, $248 in state income taxes, $11 for the Pennsylvania unemployment tax, and $254 in city income taxes.

The rest of the picture for a minimum wage worker--the gas taxes, concert taxes, sales taxes, etc.--is exactly the same as Nate's, with one big exception. For a single, full-time minimum wage worker, the government returns $31 at the end of the year as an Earned Income Credit. Nate, single and making $6.50 an hour and turning over a third of his income to the government, doesn't quality for that 8.5 cents a day. He's too rich.

Why shouldn't low-wage workers be fully exempt from federal income taxes? Nate would pocket an extra 50 cents an hour of his own money. Who can say that Leviathan needs money more than Nate? Besides, he would still be paying a fourth of his income in taxes, more than anyone should pay. That same hike of 50 cents per hour in take-home pay can be provided to minimum wage workers by exempting them from FICA and federal-income taxes.

These tax exemptions would reward the work ethic, improve the fairness of the tax system, mandate efficiencies in government, and let people keep more of the money they've earned. But it does not do what the politicians want it to do: bring in contributions from well-heeled unions that want to secure their monopoly position in the workforce.

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Ralph Reiland, a restaurant owner, teaches Economics at Robert Morris College

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