REPOST: McDonald's Minimum Wage Budget Ignores Tax Credits, Food Stamps And Reality

Image Source: forbes.com

 

McDonald’s sample monthly budget drew the ire of its minimum wage earners who dismissed it as unrealistic and insulting. Janet Novack digs deeper on the issue in this article.

Does anyone seriously believe a worker earning around the $7.25 an hour federal minimum wage can discover the “key to…financial freedom” by keeping a budget journal and exercising a little spending discipline?

That’s the conceit of a web site and pamphlet produced for employees of McDonald’s—a rightly ridiculed attempt  to show that by tracking every purchase down to a $2 soda (and, oh yeah, working two jobs and paying just $20 a month for health insurance)  someone earning $1105 a month in a primary job can not only make ends meet, but save $100 a month to realize long term financial goals.  Turns out that the fast food giant has been offering this sort of happy meal “financial literacy” program in concert with Visa Inc. and  Wealth Watchers International since 2008.   Conveniently, the left leaning ThinkProgress.org web site brought the McBudget to the public’s attention last week—just in time to give a boost to a July 24th National Day of Action being held to mark four years since the last federal minimum wage increase and press for another.

Four years? That’s nothing.  In fact, Congress hadn’t raised the minimum wage for a decade before Democrats took over the house in 2007 and pushed through a three-step increase, paired with some small business cuts to win President George W. Bush’s signature. Moreover, as this Congressional Research Service fact sheet shows, the purchasing power of the minimum wage has been on a general downward path since 1968, when it stood at $1.60—the equivalent of $10.70 in May 2013 dollars.

Few people could make ends meet on a job paying today’s minimum wage and most minimum wage earners don’t have to do so. According to the Bureau of Labor Statistics, 24% of the 3.6 million workerspaid minimum wage or less in 2012 were  teens, meaning they likely are still supported by parents. (Another 26% were under 25.)  Moreover, as the conservative Heritage Foundation points out, “a sizeable number” of minimum wage workers over 25 are married and working part time for a second income.

Still, there really are grown-ups earning minimum wages and struggling to support families—folks like Carman Iverson, a 28-year-old McDonald’s worker and mother of four interviewed here by Forbes contributor Laura Shin. But for the most part, they aren’t living off minimum wage alone. That’s because the ground such workers have lost to inflation has been made up by growing federal income supplements in the form of refundable tax credits and food stamps (now called the Supplemental Nutrition Assistance Program, or SNAP.)

Let’s do the numbers for that bastion of minimum wage employment, Texas, home to 12.7% of all workers in the U.S. paid minimum wage or less in 2012. Since people who earn the minimum wage usually don’t get paid vacation, let alone paid sick days, paid lunch breaks or health insurance, we’ll assume this minimum wage employee soldiers on through every ache, pain and sniffle, never taking time off and putting in 40 hours a week, 52 weeks a year.  That works out to $15,080 a year, or $1256 a month, or $290 a week. On that, in 2012, a worker would have paid $633 in Social Security tax (rising to $935 for 2013 with the expiration of the temporary payroll tax cut) and $219 in Medicare taxes.  Let’s also assume she had no federal income taxes withheld and since this is Texas, there’s no state income. Here’s what Intuit’s Turbotax software shows the worker would have owed–or gotten back—from the Internal Revenue Service, based on her filing status and exemptions and assuming a standard deduction.

If she’s single and childless, she would owe $259 in federal income taxes, meaning, on just a minimum wage job, she has graduated out of the 47% who, as  Mitt Romney  famously observed, pay no federal income tax.

With one child, by contrast, she would get a $4,169 tax refund from the government, composed of a  a $3,169 earned income tax credit  and a $1,000 “additional child credit”—a refundable child credit for parents who owe no income tax which was created as part of  President Obama’s 2009 stimulus and was extended through 2017 as part of January’s fiscal cliff tax deal. With two children, there’s a $4,981 check from Uncle Sam—a $3,169 EITC and $1,812 in additional child credits,  which, like the EITC are computed on a unique formula that looks at both earnings and family size.

And with three or four children? The IRS should send a $7,703 check—the maximum $5,891 EITC for 2012 and $1,812 in additional child credits. That works out to a supplement of $3.70 an hour for someone with three or four kids—a better than 50% wage boost.  So a hardworking burger flipper, or cashier, or home health care aide  is making $10.95 an hour—it’s just that other taxpayers (including, ironically, that childless minimum wage worker) are paying $3.70 of it. She also should be getting  food stamps–about $400 worth a month for a minimum wage worker with two kids, and more for a larger family.

No, minimum wage workers still can’t easily make ends meet. But this government help puts the declining purchasing power of the minimum wage in a slightly different light. The key here is that the EITC (unlike minimum wage hikes) has traditionally had bipartisan support.  Moreover,  it’s regarded by many economists  (for example,  Chrisine Roemer, who chaired President Obama’s Council of Economic Advisers)  as  a better way to help the working poor than raising the minimum wage, which economists have traditionally believed reduces the number of jobs available to entry level, lower-skilled workers.  More recently, some research has suggested that small increases in the minimum wage have no effect on employment, which means the EITC might be subsidizing not only the working poor, but also low wage employers like McDonald’s and Wal-Mart who would otherwise have to pay more for the same labor.  As economist and liberal columnist Paul Krugman put it in February,“raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers.”

Of course even if all the pointy headed economists were to suddenly agree that the optimum national minimum wage was, say $9, an increase couldn’t clear today’s Republican controlled House. Yes, living wage activists may have some successes in Blue states and cities—just this month, the Washington D.C. City Council voted to require big box retailers to pay at least $12.50 an hour, up from the current $8.25 city minimum. (But if D.C. Mayor  Vincent Gray signs the hike, Wal-Mart has said it will cancel three planned stores in the city and review three others already under construction.)

Meanwhile, living wage activists would be wise to acknowledge the income supports that have grown up around a shrinking minimum wage and to spend more of their energy defending them.  After all, the same House Republicans who unanimously voted in March against raising the minimum wage  have also just passed a farm bill stripped of the traditional funding for food stamps and are likely to demand deep cuts in this program in a deal with the Senate. They’re also pushing a 24% cut in the IRS’ budget.   What’s IRS funding got to do with minimum wage workers? It could (among other things) harm the IRS’ ability to fight the ongoing epidemic of identity theft tax  fraud  and lead to further deterioration of  already poor taxpayer service.  Both developments are likely to have a disproportionate impact on EITC recipients, who already have to wait months for their checks if their identities are stolen and (as National Taxpayer Advocate Nina Olson has pointed out) are already, in too many cases, denied earned income tax credits they rightly deserve. In the real world, that’s a bigger threat to minimum wage worker’s finances than silly financial McPlanning advice.

 

Matt Sapaula is a financial coach who helps diverse clients determine ways to handle their money and achieve personal prosperity. Visit this website to learn about the strategies that will help you weather financial realities.