Why Hillary Clinton's plan to boost wages will cost you plenty

Date: 
October 15, 2015
 
Why Hillary Clinton's Plan to Boost Wages Will Cost You Plenty
Hillary Clinton has proposed tax incentives for creating more profit sharing plans. That may help with wage disparity, but it could cost you.
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Corporations are swimming in cash. By some estimates, Apple has $194 billion in excess dollars. Microsoft has $100 billion. And Google has stashed nearly $70 billion.

At the same time, regular wages have stagnated, and have scarcely increased since the 1970s. In the second quarter of 2015, for example, wages rose a scant 0.2 percent, the lowest level in more than 40 years. In short, the middle class is having a hard time staying in place, while the companies they work for, and their executives, enjoy outsize yearly gains.

Naturally, your small business can hardly measure up to Apple's coffers--that is, if you have anything waiting in the wings at all. Still, if Hillary Clinton wins the White House, she'll push for requiring businesses to share more of their profits with employees--and that's likely to cost entrepreneurs plenty.

During the Democratic debate on Tuesday night, former Secretary of State Hillary Clinton said she had a plan to get corporations to share more of their profits with workers. Clinton was, of course, referring to a multi-part profit sharing policy brief she'd released in July.

The proposal would give companies a temporary tax break for setting up profit sharing plans, which, as their name implies, share profits with workers when times are good through defined plans. That, in theory, should give employees an incentive to work hard and make the company successful.

It may sound like a good idea on the surface, but not everyone is convinced it will achieve its goal of sharing the wealth. "It might be a worry that employers who have these plans may forgo increases in base wages," says Mark Price, a labor economist and the head of Keystone Research Center, a non-partisan think tank in Harrisburg, Pennsylvania.

So-called variable pay plans have been around for more than a century, and were first used by industrial magnates including George Eastman and William Procter out of sense of social conscience, writes Rutgers economist Joseph Blasi in this Huffington Post story. They fell out of favor when real wages rose quickly in the post World War II boom, Blasi notes. And now they're back in vogue.

Variable pay plans come in various forms. One of the most common models pools a company's profits and then distributes a portion of them to employees either in retirement accounts, or as a cash bonus. Other programs offer stock or stock options as incentives.

As far as Clinton's proposal goes, she'd give companies an expense incentive to set up a profit-sharing plan by offering a tax break of 15 percent on gains shared with employees, capped at 10 percent of a worker's salary. So, someone making $50,000 a year could earn up to $5,000 more. The program would credit the business owner an extra $750 per employee, the brief says, and there would be limits on how much high earning executives could put away. Two caveats: the plan's tax credit would phase out after two years, and small business owners would be eligible for a bigger tax deduction, though the plan does not specify how much.

Still, there would be direct and indirect costs to business owners.

As far as Clinton's program goes, the brief predicts the program would cost taxpayers--including business owners--$20 billion over a decade. However, it could partially pay for itself, by closing loopholes that now let some of the wealthiest executives take nearly unlimited deductions for performance pay, equity bonuses and profit sharing, economists Blasi, Richard B. Freeman and Douglas Kruse, note in a New York Times op ed.

While that all sounds reasonable, profit sharing plans are somewhat controversial for other reasons, these economists note. Chiefly, for profit sharing to be effective, it has to be used in conjunction with other incentives, they say. And that includes more on-the-job training, a reasonable expectation of job security, and an atmosphere where employees' input is sought for important problem solving.

Meanwhile, other studies suggest that profit sharing may not be such a great motivator for the majority of workers. In this Harvard Business School paper, for example, Kruse and economist Martin Weitzman write that some employees may not work any harder if they know their share of the payout remains fixed. They may, in effect, suffer from a "free ride" mentality, the economists note.

Price adds that profit sharing plans can cause resentments if, for example, large payouts in some years are followed by meager ones in subsequent years. Similarly, business composed of rival units might cast blame on one another if profit payouts are lower than expected.

And there are clear ongoing administrative costs for setting up such plans, as well. In addition to the fixed cost of setting up a trust for the assets to be shared, companies must create a written plan and communicate it to employees, as well as develop a recordkeeping system that accounts for earnings, losses, expenses and distributions, according to the Department of Labor.

On balance, the Clinton plan could be a step in the right direction to address wage stagnation. But for the vast majority of business owners, setting up profit sharing would be an additional ongoing expense.

"It is like giving a temporary tax break for setting up a 401(k) or offering a health plan," Price says. 

Published on: Oct 15, 2015
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