Taxing the Working Poor : The Political Origins and Economic Consequences of Taxing Low Wages

Once we get over the current global economic crisis, most developed nations will need to raise significant revenues to pay for their recent economic stimulus packages as well as for their ongoing social welfare systems. Achim Kemmerling’s book will provide policymakers with some important insights about which taxes to increase and what the consequences are for labor markets. Kemmerling observes that developed nations today all operate as substantive welfare states, and he argues that “the real question in contemporary welfare states is not whether, but how welfare is financed” (p. 1). He shows that, nowadays, most of the burden of taxation falls on labor rather than capital, and he explains how the structure of taxation in contemporary welfare states affects labor markets in general, and the low-wage sector in particular. More specifically, Kemmerling notes that contemporary welfare states are financed largely by three taxes that primarily burden labor income: income taxes, payroll taxes, and indirect (consumption) taxes.1 Income taxes typically have large exemptions and progressive tax rates. On the other hand, payroll taxes tend to be regressive as they typically have no exemptions and flat rates up to an earnings cap. Consumption taxes tend to be regressive or, at best, proportional as they typically have flat rates and a broad base (one that includes elderly retirees as well as workers). Kemmerling’s book explores how the relative mix of these three taxes