Minimum Wage Increases: Bad for Business?
Written by Doug and Polly White
As of January, the minimum wage in San Francisco increased to $10.24 per hour―about $3.00 above the Federal rate. This is a well-intended move. San Francisco is expensive. It ranks third in Kiplinger’s list of most expensive places to live in the US, behind only New York City and Honolulu. Giving those at the bottom end of the income scale a bit of a boost seems only fair―it’s right thing to do. Unfortunately, when government bureaucrats rather than the free market determine wages, there are negative, if unintended, consequences.
First Order Effects – Jobs will leave the city and unemployment will rise. Think about it. You’re a widget manufacturer in San Francisco. You need many low skilled labors. In most locations, you could hire this labor for $7.25 per hour. In San Francisco, the law forces you, to pay a 41 percent premium. You won’t be able to compete. You’ll have to move out of San Francisco, or shut your doors. Either way, the jobs are gone. Those who might have held these positions will be unemployed. The cost of government entitlements will increase (e.g., welfare, food stamps, unemployment compensation, and Medicaid). Ultimately, these higher costs will be borne by taxpayers.
Second Order Effects – Fewer new jobs will come to the city. Here’s why. Jobs at the lower end of the wage scale that are mobile will leave. However, many jobs are not mobile. Fast food restaurant workers, those who clean hotel rooms, and retail store clerks are examples. They’ll see an increase in their take home pay. That was the intent. Some currently making more than $10.24 will see increases. When low wageworkers get increases, some of those above them in the economic pecking order will be paid more to maintain their relative position.
Unfortunately, the story doesn’t end here. Shareholders legitimately demand a return on their investment. Employers can’t accept lower profits. The cost increases will be passed on to consumers. The cost of living and working in San Francisco will increase further. Companies thinking about relocating executive offices to the city will reconsider. Associations deciding where to hold national meetings will conclude that the cost in San Francisco is prohibitive. Developers will put plans for new hotels and office buildings on hold―engineers, architects and contractors will suffer. We could go on. Second order effects will mean fewer new jobs in San Francisco at every point on the income scale.
Third Order Effects – Even those who seemingly benefit from the new higher minimum wage won’t see improved lifestyles for long. The cost of living and working in San Francisco will go up. Purchasing power will be reduced―$10.24 per hour won’t buy what it used to. Eventually, people at the low end of the wage scale will have no more purchasing power than they did to start with. Cries will again go out to increase the minimum wage. The job destroying cycle will begin anew. The government can’t legislate a better lifestyle.
Still think that a government mandated minimum wage is a good idea? We have a question. If $10.24 per hour is good, wouldn’t $15, $20 or even $30 per hour be better? Of course, it wouldn’t! All of the things outlined above would happen―at an accelerated rate. This would make the inherent flaws in a government-mandated minimum wage patently obvious.
There is an alternative. Let the free market set wages. Employers will pay what’s required to fill jobs. For years, the Federal minimum wage was $5.15 per hour. However, by 2000 even McDonalds paid significantly more for entry-level jobs, because to fill positions, they had to. A government-mandated minimum wage may seem like a good idea and it may be politically expedient. Unfortunately, it does more harm than good.
About the Authors: Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The National Federation of Independent Business named it one of the best business books of 2011. The book explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at www.WhitestonePartnersInc.com
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.