Raising incomes requires mix of minimum wage, tax credits
One of the most effective ways for the government to lift people out of poverty is to encourage work. Since 1975, the Earned Income Tax Credit has done just that, by giving tax credits to working families in the lowest income bracket. Back then, Republicans loved the idea because it meant fewer people living on welfare. Democrats learned to love it too. Championed by both Ronald Reagan and Bill Clinton, the Earned Income Tax Credit helps about 26 million people today.
But sadly, the political environment has changed. President Obama’s proposal to expand this tax credit for childless workers — as well as to raise the minimum wage — faces an uphill battle, partly because an increasing number of Republicans think poverty reduction isn’t the government’s job. Mitt Romney’s remark about “the 47 percent” of Americans who don’t pay federal income tax can be viewed as an implicit attack on the EITC, which has removed so many from the rolls.
Some conservatives still pay lip service to the EITC, but often as a way to beat back the push to raise the minimum wage. Indeed, the two proposals are almost always talked of in either-or terms. A flurry of economists have argued in recent weeks that the EITC is a more efficient way to help the poor, because it doesn’t make it more expensive to hire such workers — and that the credit is better targeted, because so many people earning minimum wage are middle-class teenagers, spouses of higher earners, or semi-retired people.
That either-or thinking has played out in government policy over the years, as the federal government dramatically expanded the EITC but let the minimum wage languish. In inflation-adjusted dollars, the minimum wage has dropped from about $9.50 an hour in 1976 to $7.25 today. But over the same time period, the EITC has grown far more generous for people with children. A two-child family that would have received a $1,700 tax credit in 1976 gets about $5,200 today. That means that minimum-wage earners with families are far better off today than they were 30 years ago. But those without kids are significantly worse off.
That’s why, at a time of historic income inequality, Obama has proposed doubling the earned income tax credit for childless workers, to about $1,000. That would give a leg up to young, unskilled men who have dropped out of the workforce, a group that has been largely left out of anti-poverty programs. But Obama’s proposal to expand the EITC faces a far tougher fight than his politically popular bid to increase the minimum wage to $10.10.
That’s a shame. It’s time to put an end to “either-or” thinking, and do more research on how these two programs might work together. A 2011 study by economists David Neumark and William Wascher found that raising the minimum wage maximizes the effectiveness of the EITC for certain workers, especially women with kids. The higher wages, which are more likely to cover child-care costs, lure more women into the workforce, allowing the EITC to kick in. But every policy has its trade-offs. It makes good sense to put an end to the false choice of one versus the other, and for both parties to concentrate on finding solutions for hard-working families who are nonetheless stuck in poverty.