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Tax Credits or Minimum Wages?  We Need Both

Opinion pieces and speeches by EPI staff and associates.


Tax Credits or Minimum Wages?  We Need Both

By Jared Bernstein and Elaine Maag

Which helps low-income people the most–the minimum wage or the Earned Income Tax Credit? Granted, it’s a contest that won’t be viewed on American Idol, but this question came up, as it always does, during the recent debate to raise the federal minimum wage.

The federal minimum wage has been ignored by Congress for 10 years, and inflation has eroded its value to a 52 year low.   Now the new Congress is poised to raise the wage floor to $7.25.  But opponents of the increase have claimed all along that expanding the Earned Income Tax Credit (or EITC, a substantial wage subsidy for low-income workers) would better serve the working poor. 

It’s a false choice.  Together, these two programs balance the social cost of low-wage work between taxpayers and low-wage employers.  They are complements, not substitutes.  To place the full burden of raising low-wage on the EITC would create significant costs and undesirable incentives that neither taxpayers nor their representatives would be willing to support.

Two camps are pushing the tax credit over the wage hike.  Many business owners and their lobbyists prefer the EITC because they’d rather not have a higher minimum wage crimp their operating costs and profit margins.  Their message to Congress: If you want to help low-wage workers, use the tax code and leave us out of it.

Policy analysts like the tax credit’s more precise targeting of beneficiaries and lack of market interference.  The EITC is based on family income, not wage levels, so low-wage workers in higher-income families don’t qualify for it.  This is a legitimate preference, but it’s no reason to discount the importance of setting a national wage floor.

The minimum wage is more than an anti-poverty program.  It’s Congress’ declaration that market forces won’t be allowed to drive wages down to a pittance, no matter what the low-wage earner’s income. To judge a minimum wage solely by how effectively it targets recipients is to overlook a key reason for the policy.  And, for the record, most of the gains from the wage increase do, in fact, go to working families in the bottom 40 percent of the income scale.

Today, the EITC increases earnings by up to 40 percent.  To pack the same punch as the proposed $7.25 increase in the minimum wage after taxes for a full-time worker, the EITC would need to more than double. So would the maximum credit, currently $4,500 for a family with two or more children.

Increasing the credit would leave Congress with two choices: either phase out the credit at over 40 percent to hold down its overall cost or apply today’s phase-out rate to a larger income range. The first choice discourages work. The second, as economist Max Sawicky points out, would end up subsidizing wage levels of $30 per hour, adding tens of billions to the program’s annual cost.

There is no reason to choose between setting a wage floor or boosting the tax credit.  Together, these programs can help reconnect some of our least advantaged workers to a growing economy—one that has largely passed them by.

Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.  Elaine Maag is a Research Associate at the Urban Institute and Tax Policy Center.


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