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A maximum wage, also often called a wage ceiling, is a legal limit on how much income an individual can earn. It is a prescribed limitation which can be used to affect change in an economic structure, but its effects are unrelated to the benefits of minimum wage laws used currently by some states to enforce minimum earnings. A maximum wage does not directly redistribute wealth, but it does limit the nominal income of specific workers within a society.
Advocates argue that a maximum wage could limit the possibility for inflation of a currency or economy, similar to the way a minimum wage may limit deflation. If these hypotheses are true, implementing both pieces of legislation would achieve an economy with wages that cannot inflate or deflate past the point of the relative maximum/minimum wage (respectively). Accordingly, wages in the economy would hover between the maximum and minimum, and the populace would live between the two wage points. Supporters say a maximum wage could also reduce devaluation of a currency by limiting the amount any member of the populace can earn, and consequently effectively limiting the availability of currency.
Critics argue that a maximum wage on the upper class merely restructures compensation and benefits, moving the excess income beyond the reach of more direct taxation policies. These critics point out that in practice a maximum wage only limits the nominal income of workers, and as such has none of the redistribution benefits that a progressive income tax table with uncapped income would have. Economists of the monetarist school hold that the ability of a maximum wage to limit inflation is false; instead they believe that inflation is controlled by growth in the money supply according to the quantity theory of money, rather than through growth in actual wages.
At present, Cuba has an active maximum wage law, where individuals cannot earn more than 20 U.S. dollars per month. Egypt passed a maximum wage law in July, 2014 and faced a subsequent brain drain of the top employees within the banking sector. A vote to implement a maximum wage law in Switzerland failed with only a 34.7% vote for approval
No major economy has a direct earnings limit, though some economies do incorporate the policy of highly progressive tax structures in the form of scaled taxation.
Maximum liquid wealth
A maximum liquid wealth policy restricts the amount of liquid wealth an individual is permitted to maintain, while giving them unrestricted access to non-liquid assets. That is to say, an individual may earn as much as they like during a given time period, but all earnings must be re-invested (spent) within an equivalent time period; all earnings not re-invested within this time period would be seized.
This policy is only arguably a valid maximum wage implementation, as it does not actually restrict the wages a person is allowed to maintain, but only restricts the amount of actual currency they are allowed to hold at any given time. Proponents of the policy argue that it enforces the ideals of a maximum wage without restricting actual capital growth or economic incentive.
Proponents believe wealth that is not re-invested in the economy is harmful to economic growth; that actual liquid currency not re-invested timely is indicative of an unfair trade, in which an individual has paid more for a good/service than the good/service was worth. This stems from the belief that currency should represent the actual value of a good or service.
When this policy is imposed, individual savings can only be held as solid assets like stocks, bonds, business, and property. Opponents argue that since a maximum liquid wealth policy makes no allowance for individual savings, it therefore assumes the non-importance of a bank and the loans that banks provide. Loans being essential to the economy, opponents argue, banks are an essential economic institution. Proponents of the maximum liquid wealth policy respond that government could be directly responsible for supplying loans to individuals; they also add that such an arrangement could result in vastly lower interest rates. Of course, proponents of limited government would not find this situation ideal.
Relative earnings limit
A relative earnings limit is a limit imposed upon a business, to the amount of compensation an individual is allowed, as a specific multiple of a company's lowest earner; or directly relative to the number of individuals a company employs and the average compensation provided to each individual employee, not including a certain percentage of the company's top earners. The former implementation has the advantage of limiting wage gaps. The latter implementation has the advantage of encouraging employment opportunities, as increasing employment would be a way for employers to boost their maximum earnings. A compromise would be to base the limit upon the number of employees had by a specific company and the compensation of that company's lowest earner.
A weakness in this method is that a company can simply hire outside firms to keep low wage employees off their payroll, while only having the top earning employees on the company's payroll, effectively bypassing the limits. However, the hiring of external employees will come at a higher total cost and will reduce company profits, something against which executives are often measured and compensated.
To moderate self-employed individuals, the maximum could be based on the average compensation of the nation's employed (GDP Per Capita) and a specific multiplier. The number of self-employed individuals with no employees and who earn excessively will be extremely limited, such a measure will unlikely to be implemented.
Direct earnings limit
A direct earnings limit is a limit placed directly, usually as a number in terms of currency, upon the amount of compensation any individual is allowed to earn in a given time period.
Public salary limit
In 2011 Venezuela announced that from January 2012 its public officials would be subject to salary limits, with different types of official positions subject to different maximum salaries. At the highest level, officials may receive salaries no higher than 12 times the minimum wage. State governors, for example, may receive a maximum of 9 times the minimum wage.
Scaled taxation is a method of progressive taxation that raises the rate at which the principal sum is taxed, directly relative to the amount of the principal. This type of taxation is normally applied to income taxes, although other types of taxation can be scaled.
In the case of a maximum wage, a scaled tax would be applied so that the top earners in a society would be taxed extremely large percentages of their income. Modern income tax systems, allowing salary raises to be reflected by a raise in after tax income, tax each individual note of currency in each particular bracket at the same rate. An example follows.
|Currency Bracket:||Dollars Taxed in Bracket:||Rate:||Taxes From Bracket:||After Tax Income:||Percentage of Income Kept:|
|$1 – $40,000||$40,000||15%||$6,000||$34,000||85%|
|$40,000 - $100,000||$60,000||35%||$21,000||$34,000 + $39,000 = $73,000||73%|
|$100,000 - $175,000||$75,000||50%||$37,500||$73,000 + $37,500 = $110,500||63%|
|$175, 000 - $250,000||$75,000||60%||$45,000||$110,500 + $30,000 = $140,500||56%|
|$250,000 - $500,000||$250,000||75%||$187,500||$140,500 + $62,000 = $203,000||40.6%|
|$500,000+||$1+||90%||$0.90+||More than $203,000||Less than 40.6%|
Criticism of maximum wages
Critics of a maximum wage such as Chicago School economist Milton Friedman argue that such a policy would reduce incentive to innovate and for highly skilled workers to pursue demanding jobs. This decline in innovation would be problematic as innovation is one source of economic growth.
In England, the Statute of Artificers 1563 implemented statutes of compulsory labor and fixed maximum wage scales; Justices of the Peace could fix wages according "to the plenty or scarcity of the time".
To counteract the increase in prevailing wages due to scarcity of labor, American colonies in the 17th century created a ceiling wage and minimum hours of employment.
In the early Soviet Union, in the period 1920–1932, communist party members were subject to a maximum wage, the partmaximum. Its demise is seen as the onset of the rise of the nomenklatura class of Soviet apparatchiks. The idea that any individual could earn money by his labor, instead of earning for the community, undermined the initial principles of communism.
At the same time, while the number of individual Americans affected is small, discrepancies between low personal incomes and very high personal incomes should be lessened; and I therefore believe that in time of this grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year. It is indefensible that those who enjoy large incomes from State and local securities should be immune from taxation while we are at war. Interest on such securities should be subject at least to surtaxes.
This was proposed to be implemented by a 100% marginal tax on all income over $40,000 (after-tax income of $25,000). While this was not implemented, the Revenue Act of 1942 implemented an 88% marginal tax rate on income over $200,000, together with a 5% "Victory Tax" with post-war credits, hence temporarily yielding a 93% top tax rate (though 5% was subsequently returned in credits).
After decades of social democratic governments, the Swedish children's author Astrid Lindgren faced an infamous marginal tax rate of 102% in 1976, in effect creating a wage ceiling. Though the example was partly due to inverted loop holes in the tax code, the figure was seen as an important catalyst for the results in the election that year, in which the Social Democratic Party lost power after 40 consecutive years in power. After a "tax rebellion" and demanded the top marginal tax rates were reduced to 50% in the late 1980s.
In his 2000 run for the Green Party presidential nomination, Jello Biafra called for a maximum wage of $100,000 in the United States, and the reduction of the income tax to zero for all income below that level. Biafra claimed he would increase taxes for the wealthy and reduce taxes for those in the lower and middle classes. Many Green parties have a maximum wage in their manifesto, which they argue would prevent conspicuous consumption and the subsequent environmental damage that they believe ensues, while allowing the financing of jobs and a guaranteed minimum income for the poorest workers.
In the United Kingdom until 1901, individual clubs had set their own wage policies. That year, the Football League ratified a maximum weekly wage for footballers of £4 (2012: £368). This severely limited the ability of the best players in the country to forgo the need to take paid employment outside of football and, this in turn, led to the formation of The Players' Union in 1907.
By Summer 1928 players could earn a weekly maximum of £8 (2012: £408), although clubs routinely found ways to increase this. Arsenal player Eddie Hapgood supplemented his income by fashion modelling and advertising chocolate.
Association football retained the maximum wage until January 1961, at which point it was abolished after Jimmy Hill, chairman of the Professional Footballers' Association, threatened strike action. Before then players earned a maximum of £20 (2012: £377) a week, which was then around the average wage for a British worker. In justifying the strike action, one union representative stated that he "admired people in the mining community but it didn't mean they could cope with marking Stanley Matthews on a Saturday afternoon." Johnny Haynes became football's first £100-a-week player days after the maximum wage was abolished, and ten years later George Best was earning £1,000 (2012: £12,000) a week.
- Salary cap
- Minimum wage
- Family wage
- Gini coefficient
- Welfare economics
- Income inequality metrics
- Social welfare
- Dietl, H., Duschl, T. and Lang, M. (2010): "Executive Salary Caps: What Politicians, Regulators and Managers Can Learn from Major Sports Leagues", University of Zurich, ISU Working Paper Series No. 129.
- Venezuelanalysis.com, 15 February 2011, Wage Limits Set for State Officials in Venezuela
- TaxAlmanac - Online tax collaboration
- U.S. Department of Labor history on wage laws in England and the American Colonies[dead link]
- (Pizzigati 2004, Historic Struggles, pp. 440–441)
- How About a Maximum Wage? : Taxation: F.D.R. wanted to cap incomes of the wealthy--an idea whose time may have come again., Los Angeles Times, April 08, 1992, Sam Pizzigati
- "Corporate Greed, Meet The Maximum Wage", by Steven Greenhouse, The New York Times, June 16, 1996
- John McManus, ‘McGrory, James Edward [Jimmy] (1904–1982)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Jan 2010
- Jeffrey Hill, ‘Hapgood, Edris Albert [Eddie] (1908–1973)’, Oxford Dictionary of National Biography, Oxford University Press, 2004; online edn, Jan 2010
- Bernstein, Joe (8 November 2011). "SPECIAL REPORT: Too many average footballers are millionaires... they drive Ferraris but they deserve a Reliant Robin". Daily Mail. Retrieved 8 November 2011.
- Pizzigati, Sam (1992), The Maximum Wage: A Common-Sense Prescription for Revitalizing America - By Taxing the Very Rich, Rowman & Littlefield Publishers, p. 138, ISBN 978-0-945257-45-5
- Pizzigati, Sam (2004), "A Maximum Wage" (PDF), Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives, The Apex Press, ISBN 978-1-891843-25-9, full text online
- TaxAlmanac - Online tax collaboration A wiki created by tax professionals with detailed information on US IRS Tax Law and the only known free up to date copy of the US Internal Revenue Code.
- A simple microeconomic explanation of wages, skill, and utility[dead link]
- Would a maximum wage make life better? at the Wayback Machine (archived March 31, 2009) - An editorial explores pros and cons of a maximum wage