The Math Behind the Affirmative Wage Deduction
[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)