Earned Income Credit Better for Working Poor than Minimum Wage

Earned Income Credit Better for Working Poor than Minimum Wage
May 30, 2012

New York Assembly Speaker Sheldon Silver (D-NY) is leading a push to raise that state’s minimum wage from the federally mandated $7.25 an hour to $8.50 an hour, with future annual increases tied to the Consumer Price Index.

“It has a moral imperative, and it has a practical imperative. People who work 35 hours a week should not be poor,” Silver said in announcing his bill.

But in their 2008 book Minimum Wages, economists David Neumark and William Wascher conclude increasing the minimum wage “neither helps low income families nor reduces poverty.”

A recent policy brief by Russell Sykes of the Empire Center for New York State Policy helps explain why, and it elucidates the widespread but politically unsung alternative to the minimum wage: the Earned Income Tax Credit (EITC).

Sykes is a former deputy commissioner for the Center for Employment and Economic Supports in New York's Office of Temporary and Disability Assistance. He believes this nearly tax policy of nearly four decades is more effective than minimum wage laws at assisting the working poor. Sykes explains:

Budget & Tax News: Why is the EITC better than the minimum wage at reducing poverty?

Russell Sykes: First, there is an abundance of research, as Wascher and Neumark show in their book, that there are negative employment effects to minimum wage increases. But what we’re more interested in pointing out is that between the federal and [New York] state EITC, we’re already adding $4.6 billion to low-income workers’ wages in a far more targeted fashion.

It doesn’t lead to job loss, it doesn’t deter hiring, and, since it penetrates to about 80 percent of [low-income] working families with children, it already raises the effective minimum wage for a mom with two kids from $7.25 to $10.44 an hour.

None of the people who’ve discussed the minimum wage increase in New York have even broached the topic of what the EITC at the federal and at the state level already does.

BTN: In your brief you note the EITC is often not factored into official measures of poverty. Would you care to elaborate?

RS: In addition to the federal EITC, 26 states have their own EITC programs, pegged mostly to the federal rate. New York has by far the largest. It puts about $1 billion back into workers’ pockets. The official Census measures of poverty don’t look at either EITC as a form of income, and, I think, therefore greatly over-count the number of people in poverty.

BTN: What would you say to an argument that minimum wage increases have businesses foot the bill for poverty rather than the taxpayer?

RS: The public expenditure for the EITC exists, [and] it’s substantial, but it’s been a bipartisan agreement for decades. It’s a recognition of the fact that there will always be low-wage earners with limited skills and workforce history, but we still want them to be working and productive.

If you raise the minimum wage in New York as is being discussed, you’re adding $2,600 a year to the cost of each worker. There’s a strong research basis that workers are less likely to be hired if you price them out of their skill set.

BTN: Given that the EITC is demonstrably better at supplementing low-wage earners’ pay than a minimum wage increase, what do you think explains the political support for the minimum wage?

RS: I think you used the key word—I think it’s politics. I think a lot of the people who advance minimum wages tend to ignore the costs on businesses and the possible negative employment effects because it resonates well with a lot of their constituents, particularly union labor.

Our general point is, putting aside whether you’re going to increase either the minimum wage or the EITC, at least be realistic about what the reality is for low-income working families with children who earn at or near the minimum wage.

The fact of the matter is that the nominal $7.25 that everyone talks about is not the case. To be transparent in the debate about whether you should or should not raise wages, you should throw all the factors into the mix and discuss what [incomes] really are with the EITC rather than acting as if people are actually living on $15,000 a year. With the EITC that mom with two kids is actually [getting] $21,700-plus a year.

BTN: If you could make a general argument about the EITC to state or municipal officials considering adopting a higher minimum wage, what would it be?

RS: It comes down to the targeting issue. If we’re talking about increasing the minimum wage as a way to mitigate poverty, it doesn’t do that; the EITC does. The EITC has a very high penetration rate, unlike a lot of other programs like food stamps and so forth. There are no caseworkers, no interviews, you file by filing a tax return.

In 2007, Sen. [Charles] Grassley asked the Government Accountability Office to compare the benefits of hypothetical minimum wage increases and EITC expansions. The GAO report showed that about 60 percent of the EITC benefit would have gone to poor families, whereas only about 16 percent of minimum wage benefits would have.

Ian Mason (ninthoption@gmail.com) writes from Chicago.

Internet Info

“Making Work Pay in New York: The Earned Income Tax Credit,” Russell Sykes, Empire Center for New York State Policy: http://heartland.org/policy-documents/making-work-pay-new-york-earned-income-tax-credit