Patterico's Pontifications

12/4/2016

The Math Behind the Affirmative Wage Deduction

Filed under: — Patterico @ 2:31 pm

[This is a page designed to accompany this guest post by David Barulich. — P]

Current Situation:

An employer has revenue of $1,000,000 and pays $500,000 in wages to illegal immigrants who have provided fake documents to the employer.

His net income for taxation = $500,000.

Assume a 40% marginal tax rate so his net income after taxes = $500,000 x (100% – 40%) = $300,000.

With Affirmative Wage Deduction in place, the employer could not deduct $500,000 of wages, so his taxable income would equal $1,000,000.

He would be obligated to pay $400,000 in taxes.

Now his net income after taxes would equal $1,000,000 – $500,000 (illegal wages) – $400,000 (taxes) = $100,000.

Under Affirmative Wage Deduction, his net income after taxes would be lowered from $300,000 to $100,000.

Suppose that he has to pay legal workers $700,000 compared to paying illegal workers $500,000.

Now the result would be: $1,000,000 – $700,000 = $300,000 taxable income.

$300,000 x (100% – 40%) = $180,000.

Under Affirmative Wage Deduction, he would make $80,000/year more with a legal workforce than he would hiring an illegal work force.

The general solution for determining when it makes sense to hire legal over illegal workers is:

Break-Even Legal Wages = (Illegal Wages) / (1 – tax rate)

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