After thinking quite a bit about my recent post on wages, I may have come up with a fairly reasonable suggestion.

The premise of that post was that in order to get ourselves out of our current economic woes, we need to get more money in the hands of a lot more people; in other words, increasing the buying power of the lower and middle classes.

Now the argument from the right will be, as it always has, “lower their taxes!” But that argument always falls apart when you look at the numbers. The median (average) household income in the US in 2009 was just under $50,000 (Source: US Census Bureau 2010). At that level, the tax rate typically ends up being taxed at the 15% rate (sorry for the Wikipedia reference, I try to avoid it, but the IRS site is simply too complicated – and slanted toward justifying lower taxes for the wealthiest individuals, but I’ll explain that elsewhere). So even if we reduced taxes for this quintile by 1/3 (resulting in a 10% tax rate, which is pretty low), this would translate to a meager $2500 of extra income at that level. Yes, that’s better than nothing, but I suggest a different method. Instead of lowering their taxes, why not get employers to pay them more?

So first, I’ll write an appeal to any and all business owners, corporate executives, and everybody else who might have the power to increase somebody’s wage (that means everybody who can vote too). Please, PLEASE, I beg of you, consider rewarding those who work for you, especially the best and most valuable of them. You won’t regret it. Not only will it entice the best of them to stick around, and work harder, but when people have more money, they will spend it. And if every business owner raised wages, everybody would have more money to spend, which would mean more potential business for your business.

Unfortunately, as a nation, we can’t just ask employers to start paying their people more. Despite it being in their best interest to do so, businesses are just as scared as people right now. So how about an incentive?

I am always hearing a phrase being thrown around by the tax-hawks, “The U.S. has the highest corporate tax rate in the world.” First, this isn’t exactly true; Japan has higher rates (see here and here). But more importantly, one must look at the language being used in this argument. Yes, our corporate tax rate is high. But thanks to the number of government-sanctioned loopholes and tax breaks, the actual tax collected for most corporations is far below the published “corporate tax rate.”

In fact, as it turns out, most US corporations actually pay NO income tax at all (read it here – and you can read the actual nonpartisan GAO report here). So in reality, while our corporate tax rate is high, our corporate tax collections are extremely low. As a percentage of GDP, our corporate tax revenues are some of the lowest in the world! By this measure, we’re second only to Iceland according to this CBO report (see page ‘x’).

So if wages have been falling (see my wages post), and corporate tax revenue has been falling (see here and here), and corporations are sitting on a huge pile of cash, how can we reverse this trend?

From the wealth-redistribution crowd, we hear a “Tax the rich!” mantra being yelled at rallies. Frankly, I don’t see how that helps us. Sure, the government could take a bunch of money away from corporations and the wealthy, but that STILL doesn’t get it into the hands of the massive, struggling middle and lower classes. Even if we were to lower their taxes significantly, it still only results in a meager increase in spending power. No, wouldn’t it be better if corporations and other employers were to give it directly to the people, especially if it is in exchange for actual work?

So here’s the basis of my incentive idea: let’s change the way we handle corporate taxes.

First, we’ve got to eliminate a lot of those tax breaks and loopholes. Especially the ones that make it more profitable for companies to send jobs abroad. If we don’t eliminate these, we’ll never be able to convince corporations to do anything.

Second, and at the same time, let’s go ahead and lower the corporate tax rate. I mean, they aren’t paying the 35% anyway (and most aren’t paying any) so whom are we fooling? Let’s lower it a little and eliminate that flawed, yet quotable, argument about high tax rates. But we shouldn’t just drop them across the board. No, we need to do a sliding scale of sorts, and base that scale on something. Something like…wages.

Yes! Third and finally, we should base the corporate tax rate on the average (that’s mean, not median) wage/salary of all of a company’s employees. The higher the average wage, the lower the corporate tax rate.

Again, it is important to stress that this must be the average rather than the median, as executive pay would throw off the number considerably in a median scenario. Additional tax breaks could be given for other desirable employee benefits such as a retirement contribution plan, health insurance, sick leave, and so on. The tax rates could be established through a tiered system ranging from a lowest tax rate of perhaps 10%, up to a highest rate of the current 35%, or even higher. After all, it needs to be a powerful motivator; we need to get that cash out there!

This would not only improve the company’s tax liability, but it would improve the lives of its employees and increase their spending power. This, in turn, generates more income tax revenue as well, helping to address our nation’s budget shortfalls (yes, controlling spending is important too).

Think about it, the more a company pays its employees, the higher their overhead (which already reduces their tax liability), and the lower their tax rate (which reduces it even more).

A problem with this plan is the difficulty of establishing some sort of grouping or qualifying mechanism that would allow for different industries to be taxed accordingly. Otherwise, low-skill industries would be unfairly taxed at a higher rate. After all, an engineering firm would likely have much higher salaries than a cleaning business, for example. A law firm should not be analyzed the same as a low-skill manufacturing plant. But the IRS and our tax code have accomplished bigger tasks and I am sure that policy wonks would be able to use available government data to create a reasonable model.

Nonetheless, the idea itself is a cure-all of sorts. Employers pay lower taxes. Employees get paid more, which they will, in turn, immediately spend (after all, that’s what they do) and thereby rejuvenate industries like housing, cars, technology, financial investment, and travel. And then, as an added bonus, income tax revenues will go up as well, without raising the tax rates. But most importantly, we would break a deplorable and disturbing 30-year trend in falling or stagnant wages in this country and likely would improve the outlook of millions of Americans.

After all, if we all just had a little more, the daily struggle might not feel as bad. Face it; higher pay makes people happier, both at home and at work. They have a little less to worry about and a little more to spend on their own happiness. Now who doesn’t like the sound of that?

That’s the best I’ve come up with. Anybody got anything better?