Maximum wage

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A maximum wage, also often called a wage ceiling, is a legal limit on how much income an individual can earn.1 This is a related economic concept that is complementary to the minimum wage used currently by some states to enforce minimum earnings. Both a maximum and minimum wage are methods by which wealth can be redistributed within a society.

Advocates argue that a maximum wage could limit the possibility for inflation of a currency or economy, similar to the way a minimum wage may limit deflation. If these hypotheses are true, implementing both pieces of legislation would achieve an economy with wages that cannot inflate or deflate past the point of the relative maximum/minimum wage (respectively). Accordingly, wages in the economy would hover between the maximum and minimum, and the populace would live between the two wage points. Supporters say a maximum wage could also reduce devaluation of a currency by limiting the amount any member of the populace can earn, and consequently effectively limiting the availability of currency. Economists of the monetarist school hold that this position is false; instead they believe that inflation is controlled by growth in the money supply according to the quantity theory of money, rather than through growth in actual wages.

Implementation

No major economy has a direct earnings limit, though some economies do have highly progressive tax structures in the form of scaled taxation.

Maximum liquid wealth

A maximum liquid wealth policy restricts the amount of liquid wealth an individual is permitted to maintain, while giving them unrestricted access to non-liquid assets. That is to say, an individual may earn as much as they like during a given time period, but all earnings must be re-invested (spent) within an equivalent time period; all earnings not re-invested within this time period would be seized.

This policy is only arguably a valid maximum wage implementation, as it does not actually restrict the wages a person is allowed to maintain, but only restricts the amount of actual currency they are allowed to hold at any given time. Proponents of the policy argue that it enforces the ideals of a maximum wage without restricting actual capital growth or economic incentive.

Proponents believe wealth that is not re-invested in the economy is harmful to economic growth; that actual liquid currency not re-invested timely is indicative of an unfair trade, in which an individual has paid more for a good/service than the good/service was worth. This stems from the belief that currency should represent the actual value of a good or service.

When this policy is imposed, individual savings can only be held as solid assets like stocks, bonds, business, and property. Opponents argue that since a maximum liquid wealth policy makes no allowance for individual savings, it therefore assumes the non-importance of a bank and the loans that banks provide. Loans being essential to the economy, opponents argue, banks are an essential economic institution. Proponents of the maximum liquid wealth policy respond that government could be directly responsible for supplying loans to individuals; they also add that such an arrangement could result in vastly lower interest rates. Of course, proponents of limited government would not find this situation ideal.

Relative earnings limit

A relative earnings limit is a limit imposed upon a business, to the amount of compensation an individual is allowed, as a specific multiple of a company's lowest earner; or directly relative to the number of individuals a company employs and the average compensation provided to each individual employee, not including a certain percentage of the company's top earners. The former implementation has the advantage of limiting wage gaps. The latter implementation has the advantage of encouraging employment opportunities, as increasing employment would be a way for employers to boost their maximum earnings. A compromise would be to base the limit upon the number of employees had by a specific company and the compensation of that company's lowest earner. One weakness in this method is that a company can simply hire outside firms to keep the low wage employees on their payroll, while only having the top earning employees on the companies payroll, effectively by-passing the limits.

To moderate self-employed individuals, the maximum would be based on the average compensation of the nation's employed (GDP Per Capita) and a specific multiplier.

Direct earnings limit

A direct earnings limit is a limit placed directly, usually as a number in terms of currency, upon the amount of compensation any individual is allowed to earn in a given time period.

Public salary limit

In 2011 Venezuela announced that from January 2012 its public officials would be subject to salary limits, with different types of official positions subject to different maximum salaries. At the highest level, officials may receive salaries no higher than 12 times the minimum wage. State governors, for example, may receive a maximum of 9 times the minimum wage.2

Scaled taxation

Scaled taxation is a method of progressive taxation that raises the rate at which the principal sum is taxed, directly relative to the amount of the principal. This type of taxation is normally applied to income taxes, although other types of taxation can be scaled.

In the case of a maximum wage, a scaled tax would be applied so that the top earners in a society would be taxed extremely large percentages of their income. Modern income tax systems, allowing salary raises to be reflected by a raise in after tax income, tax each individual note of currency in each particular bracket at the same rate.3 An example follows.

Calculations are made for the top of each bracket
Currency Bracket: Dollars Taxed in Bracket: Rate: Taxes From Bracket: After Tax Income: Percentage of Income Kept:
$1 – $40,000 $40,000 15% $6,000 $34,000 85%
$40,000 - $100,000 $60,000 35% $21,000 $34,000 + $39,000 = $73,000 73%
$100,000 - $175,000 $75,000 50% $37,500 $73,000 + $37,500 = $110,500 63%
$175, 000 - $250,000 $75,000 60% $45,000 $110,500 + $30,000 = $140,500 56%
$250,000 - $500,000 $250,000 75% $187,500 $140,500 + $62,000 = $203,000 40.6%
$500,000+ $1+ 90% $0.90+ More than $203,000 Less than 40.6%

Criticism of maximum wages

Critics of a maximum wage such as Chicago School economist Milton Friedman argue that such a policy would reduce incentive to innovate and for highly skilled workers to pursue demanding jobs. This decline in innovation would be problematic as innovation is one source of economic growth.

Austrian economists and libertarian think-tank Mackinac Center for Public Policy argue that inflation is not caused by wages but by governments printing money. In addition, they highlight the fact money is a commodity whose value is subject to supply and demand. They argue likewise that the increased demand for labour brought about by a maximum wage will prevent an economy running at its most effective because people will try to circumvent a situation where wages are kept below free-market levels.45

Empirical support

A 2010 study from Princeton University's Woodrow Wilson School indicates the existence of a "happiness ceiling" of as low as $75,000 a year, beyond which increases in wage do not increase personal satisfaction anymore.6

History

In England, the Statute of Artificers 1563 implemented statutes of compulsory labor and fixed maximum wage scales; Justices of the Peace could fix wages according "to the plenty or scarcity of the time".

To counteract the increase in prevailing wages due to scarcity of labor, American colonies in the 17th century created a ceiling wage and minimum hours of employment.7

In the early Soviet Union, in the period 1920–1932, communist party members were subject to a maximum wage, the partmaximum. Its demise is seen as the onset of the rise of the nomenklatura class of Soviet apparatchiks. The idea that any individual could earn money by his labor, instead of earning for the community, undermined the initial principles of communism.

In 1942, during World War II, US President Franklin D. Roosevelt proposed a maximum income of $25,000 during the war:89

At the same time, while the number of individual Americans affected is small, discrepancies between low personal incomes and very high personal incomes should be lessened; and I therefore believe that in time of this grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year. It is indefensible that those who enjoy large incomes from State and local securities should be immune from taxation while we are at war. Interest on such securities should be subject at least to surtaxes.

This was proposed to be implemented by a 100% marginal tax on all income over $40,000 (after-tax income of $25,000). While this was not implemented, the Revenue Act of 1942 implemented an 88% marginal tax rate on income over $200,000, together with a 5% "Victory Tax" with post-war credits, hence temporarily yielding a 93% top tax rate (though 5% was subsequently returned in credits).8

After decades of social democratic governments, the Swedish children's author Astrid Lindgren faced an infamous marginal tax rate of 102 % in 1976, in effect creating a wage ceiling. Though the example was partly due to inverted loop holes in the tax code, the figure was seen as an important catalyst for the results in the election that year, in which the Social Democratic Party lost power after 40 consecutive years in power. After a "tax rebellion" and demanded the top marginal tax rates were reduced to 50 % in the late 1980s.citation needed

Since the 1990s, the chief proponent of a maximum wage in the United States has been Sam Pizzigati;10 see References, particularly (Pizzigati 2004).

In his 2000 run for the Green Party presidential nomination, Jello Biafra called for a maximum wage of $100,000 in the United States, and the reduction of the income tax to zero for all income below that level. Biafra claimed he would increase taxes for the wealthy and reduce taxes for those in the lower and middle classes.citation needed Many Green parties have a maximum wage in their manifesto, which they argue would prevent conspicuous consumption and the subsequent environmental damage that they believe ensues, while allowing the financing of jobs and a guaranteed minimum income for the poorest workers.

Association football

In the United Kingdom until 1901, individual clubs had set their own wage policies. That year, the Football League ratified a maximum weekly wage for footballers of £4 (2012: £368). This severely limited the ability of the best players in the country to forgo the need to take paid employment outside of football and, this in turn, lead to the formation of The Players' Union in 1907.

By Summer 1928 players could earn a weekly maximum of £8 (2012: £408), although clubs routinely found ways to increase this.11 Arsenal player Eddie Hapgood supplemented his income by fashion modelling and advertising chocolate.12

Association football retained the maximum wage until January 1961, at which point it was abolished after Jimmy Hill, chairman of the Professional Footballers' Association, threatened strike action.13 Before then players earned a maximum of £20 (2012: £377) a week, which was then around the average wage for a British worker.13 In justifying the strike action, one union representative stated that he "admired people in the mining community but it didn't mean they could cope with marking Stanley Matthews on a Saturday afternoon."13 Johnny Haynes became football's first £100-a-week player days afterwards the maximum wage was abolished, and ten years later George Best was earning £1,000 (2012: £12,000) a week.13

In his campaign for the French presidency in 2012, Jean-Luc Melenchon argued in favour of a tax rate of 100 % on incomes over 360,000 euros.14

Related concepts

Maximum Total Earnings legislation suggests that when a person has accumulated sufficient wealth that they can survive on the interest alone they must stop working and allow someone else to work. This theoretical concept assumes there is a set amount of work to be done in an economy (the lump of labor theory), and is not supported by any major form of modern economic thought. Attempts to reduce unemployment by removing people from the labor force, as is proposed by this theory, have been a failure.citation needed

See also

References

  1. ^ Dietl, H., Duschl, T. and Lang, M. (2010): "Executive Salary Caps: What Politicians, Regulators and Managers Can Learn from Major Sports Leagues", University of Zurich, ISU Working Paper Series No. 129.
  2. ^ Venezuelanalysis.com, 15 February 2011, Wage Limits Set for State Officials in Venezuela
  3. ^ TaxAlmanac - Online tax collaboration
  4. ^ Unemployment: Causes and Cures
  5. ^ Should the government ever impose a "maximum wage"? from "Conservative/Libertarian Think-Tank" The Mackinac Center for Public Policy
  6. ^ Luscombe, Belinda (6 December 2010). "Study: Money Buys Happiness When Income Is $75,000 – TIME". Time Magazine. Retrieved 12 January 2013. 
  7. ^ U.S. Department of Labor history on wage laws in England and the American Colonies
  8. ^ a b (Pizzigati 2004, Historic Struggles, pp. 440–441)
  9. ^ How About a Maximum Wage? : Taxation: F.D.R. wanted to cap incomes of the wealthy--an idea whose time may have come again., Los Angeles Times, April 08, 1992, Sam Pizzigati
  10. ^ "Corporate Greed, Meet The Maximum Wage", by Steven Greenhouse, The New York Times, June 16, 1996
  11. ^ John McManus, ‘McGrory, James Edward [Jimmy] (1904–1982)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Jan 2010
  12. ^ Jeffrey Hill, ‘Hapgood, Edris Albert [Eddie] (1908–1973)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Jan 2010
  13. ^ a b c d Bernstein, Joe (8 November 2011). "SPECIAL REPORT: Too many average footballers are millionaires... they drive Ferraris but they deserve a Reliant Robin". Daily Mail. Retrieved 8 November 2011. 
  14. ^ http://revolting-europe.com/2012/04/12/french-give-thumbs-up-to-melenchons-plan-to-boost-minimum-wage/

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