“Insanity” is not too strong a word to describe the advocacy of a minimum wage.

After decades of experience with minimum wage laws, and increasing evidence that the laws achieve precisely the opposite of the claims of the advocates, we get: more increases in the minimum wage. Most recently, Gov. Arnold Schwarzenegger has caved to the Democrat-controlled California Assembly and agreed to raise our state’s mimimum wage once again. The reason? Because the minimum “has not kept up with inflation.”

Since inflation is defined as increases in the prices of goods and labor, it’s actually a good thing that the mimimum wage has remained at a level below which it can do harm. If it’s raised above the value of labor as determined by the labor market, then it becomes harmful again, by making unskilled and entry-level workers too costly to hire.

Study after study (not to mention basic laws of economics) have shown that minimum wage laws are anti-poor, anti-worker, and anti-small business.

Why is it anti-poor? Because many people are poor because they have no work history or no skills. They can’t establish a work history or learn skills unless someone hires them. An no one will hire them if they have to be paid more than they can produce. Result: less mobility for the poor.

Why is it anti-worker? Because setting labor costs by government fiat creates distortions in the labor market. Price is information, but when a price is dictated, its value as an information tool is lost. Result: the information is transmitted through other (now illegal) means, such as a grey or black market. One manifestation of a grey labor market is illegal immigrants performing jobs that native youths used to do.

Why is it anti-small business? Because small businesses, which are the source of most of our economic growth, operate at the edge of profitability while being the primary sources of employment for entry-level or unskilled workers. Thus, they are more likely to be paying at the lower end of the wage scale. An increase of the lowest wage of only few cents an hour can increase the labor costs of a small mom-and-pop bakery by several thousand dollars a year. Result: the corner bakery closes and reopens as another nail salon and and the bakery business moves to a big-box grocery in the strip mall.

The obvious question is since an artificial minimum wage is is harmful to workers and the economy, someone has to benefit or it wouldn’t keep being raised. You need only to look at the advocates: big business and big labor.

Labor unions have been the primary financial and political force behind minimum wage laws. Now, the lowest-paid union member makes a wage well above the minimum wage through his union’s collective bargaining agreement (CBA). Isn’t it possible that this makes him less competitive than a lower paid non-union worker with the same productivity?

Likewise, businesses under the same CBA and high labor overhead have to compete against smaller businesses without such an overhead. Even large businesses without a CBA have high labor overhead partly due to mandated fringe benefits. Hence, you get Wal-Mart CEO Lee Scott speaking out in favor of raising the minimum wage to a level at least as high as the entry-level wage Wal-Mart already pays.

In economic terms, then, a minimum wage above the market wage becomes a tax on labor. If you want more people to be employed (especially those who need employment most), you tax their labor less, not more. Also, as I have previously shown, businesses don’t pay taxes, they only collect them — from their customers. If they had to pay them themselves, they no longer meet the criteria of a business (producer) and revert to being a consumer. The macro-level ramifications of this phenomenon and its impact on current account balances are the subject of another rant.

If lawmakers really cared and could really make a case that a class of workers isn’t being paid a “living wage,” then they should grant these workers direct payments, and not force already-burdened but economically vital small businesses to do this for them.

Sen. Ron Wyden (Oregon) and Rep. Rahm Emanuel (Illinois) are the only two Democrats who are advocating tax reform and simplification. And their proposals have many merits on the surface. I read about them in the WSJ last Friday, in an article they contributed, which lacked many specifics, which is as to be expected. You want to make sure the readers’ eyes don’t glaze over, but you also want to hit the high points, the kind you hope to get the reader onboard.

Unfortunately, Wyden and Emanuel seemed to be unaware of WSJ readership, which is not the same as LA Times readership. Or even NYT readership or Washington Post readership. Sure, most (but not all) WSJ readers are Republicans, who can be counted on to favor tax reform. However, there are a significant number of Republicans who benefit substantially from the complexity of the current tax code (tax advisors, tax preparers, the real estate industry, and those who avail themselves of multiple deductions and credits).

But most of the WSJ readers are also investors, or people who make their living from the investor class. They may be Democrat or Republican, but by the nature of their work and livelihood, they find out right away that what Wyden and Emanuel are proposing has serious flaws.

From a political standpoint, their proposal makes a great deal of sense. By and large, the taxpaying public has been screaming for reform and simplification for many years, but only Ronald Reagan has listened to them, and that was over 20 years ago. The current crop of Republicans seem to be fearful of even mentioning reform, and many are even becoming squishy of tax cuts (though they have no problem with earmark spending in their own districts). So Wyden and Emanuel have found a political void to fill. After all, George W. Bush never even mentioned tax simplification in his State of the Union address. This counts as another missed opportunity that at least some Democrats have the wisdom to exploit. Cutting taxes is fine, but reforming the code is also needed, and Wyden and Emanuel recognize this.

In a nutshell, Wyden and Emanuel’s “Fair Flat Tax” proposes reducing the number of tax brackets from five to three. Positive. It also repeals the loathsome Alternative Minimum Tax (AMT). Another positive. It increases the Standard Deduction and terminates many itemized dedutions. Positive again.

What’s not to like? Well, it treats income from dividends and capital gains as ordinary income. Meaning that it repeals the capital gains and dividend cuts which enabled the current economic expansion. Meaning that it raises taxes.

Wyden and Emanuel don’t even argue that their proposal is revenue neutral. They do say that an objective is to reduce the deficit. In Democrat-speak, deficits are the result of not enough taxes, and are reduced by raising taxes. Never mind that throughout our history, not a single tax increase produced the increased revenue that was predicted, and every tax increase was followed by an even larger spending increase.

They also say that the targeted increases (which they call a repeal) are paid mostly by the rich. This is patently false. The vast majority of filers who pay these taxes are middle-income.

They want to reduce the tax on wage income, so as not to penalize work. But they want to increase the tax on investment income to “make up the difference.” In effect they want to penalize savings (which allows people to retire on their own resources and not the government’s) and investment (which propels economic growth and job creation). There is no way this formula will reduce the deficit; in fact, based on past experience, it will add to it. A better formula would be to eliminate taxes on capital gains (long-term) and dividends entirely.