Minimum Wage: A tax by another name?

By Christopher Sallie
AIMS on Campus Fellow

Income inequality has become a topic for debate across Canada, as we begin to feel the impacts of declining oil prices on the average household income. Maritime governments are coming under increased pressure to address this issue and raising the minimum wage appears to be the preferred solution.

But will such a policy achieve the desired outcome? The quagmire that is minimum wage best embodies the need for sound policy during a time of sluggish economic growth. A half-measures such as this may have an adverse impact, as it fails to address the underlying issue relating to income inequality: taxation.

Proponents of increasing the minimum wage well argue that addressing income inequality may improve the most vulnerable in our society by offering them a wage that allows them to meet their most basic needs. Opponents to such proposals believe the raising of minimum wages will put a drag on small and medium business in an already fragile economy, and say that addressing matters of tax reform would be a far more effective means in increasing take home pay. On this matter, we would be wise to listen to the opponents on this issue.

The Basic Personal Exemption (BPE) is the earnings threshold that both levels of government set when determining what an individual may earn without having to pay taxes. The Atlantic provinces have some of the lowest BPEs in the country. When compared to those of the Western provinces, in some instances the BPE threshold is almost twice as high as their eastern counterparts. The reluctance of provincial governments to increase these amounts is a testament to the composition of their respective labour forces. They know well that any increases in the BPE will have a negative impact on government revenues, forcing them to make unpopular decisions come March and putting their political ambitions at risk.

In October 2015, the PEI branch of the Canadian Federation of Independent Business was asked to speak to a Legislative Committee about the impacts of wage increases and presented some troubling findings. In their report, they found that “there have been substantial increases to the minimum wage while no adjustments have been made to the tax system. The result has been that the effective rate of personal income tax paid by a full-time minimum wage earner has grown from 3.4% in 2002 to 5.7% in 2014”.

It is clear that this type of policy fails to improve the disposable income of low income earners. By ignoring the impacts such a policy on small- and medium-sized businesses, and their ability to invest in growth through increased payroll taxes, failure to address tax fairness on full-time, minimum-wage earners would make any minimum wage increase irrelevant.

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