The great debate on poverty reduction in America has pivoted towards the relative impact of expanding the Earned Income Tax Credit (EITC) versus raising the minimum wage.
President Obama’s recent proposed budget to Congress included provisions for both. Motivated by the increasing income gap across the U.S. population, consideration of these two proposals will certainly shape future economic policy even if they are unlikely to be passed this year let alone implemented and take effect.
The EITC is aimed at benefiting working individuals with low to moderate income through tax credits. For example, a single unmarried individual could have earned up to $487 in 2013 while a married couple with two children could have earned 11 times that in tax credit.
The administration’s proposed budget would entail doubling the maximum credit for unmarried childless individuals (a policy cited as targeting young males), increasing the maximum qualification amount and lowering the age qualifying restriction from 25 to 21 years.
The amendment would be paid for by reducing tax breaks on investment manager income known as carried interest. Politically, a refreshing majority of policy makers across the aisle support expansion of the EITC, another example of the shift in interest toward the working poor gaining momentum locally and globally.
The same degree of support, however, has not been given to the minimum wage-hike proposal even though 70 percent of Americans surveyed by the December Quinnipiac Poll are in favor of the bill.
In contrast to EITC reform, increasing the minimum wage has a more dichotomous range of consequences.
The most recent release from the non-partisan Congressional Budget Office investigating the impacts of increasing the minimum wage from $7.25 to $10.10, to be gradually implemented through 2016, provided ammunition for both sides of the debate.
The report found that the policy would lift 900,000 individuals out of poverty as 16.5 million people would experience an increase in earnings. Those workers impacted, in addition to being concentrated in the service industry, are disproportionately young and female.
However, this economic improvement, as stated in the analysis, would come at the expense of 500,000 job losses through 2016 as firm labor costs may increase.
It’s a bit curious, however, that the two million job losses through 2019 associated with austerity policies (as also estimated by the CBO) have not been met with similar fervor as that associated with this proposal and the former was already passed by Congress last year. To be sure, the CBO has acknowledged their estimated 500,000 job losses could be as low as a very small reduction and as high as one million.
For comparative purposes, it is useful that the parameters surrounding the two policies are quite different.
From a fiscal standpoint, the EITC is more costly to police relative to the minimum wage policy. The comparative advantage of the IRS is likely in enforcement of the tax code for higher income individuals and businesses. In fact, EITC already costs $67 billion a year to implement; the expansion would add another $60 billion in costs over 10 years.
In contrast, the administrative costs of regulating minimum wage policy are nearly negligible with high growth in labor demand for lower wage industries making the policy almost self-enforcing.
There is also much evidence in support of a higher minimum wage.
Simply put, wage growth has stagnated for years. Adjusting for inflation, low-wage workers in 1968 — when the policy was established under Lyndon Johnson’s poverty reduction initiative — earned more than a similar worker today, even though contemporary productivity levels are considerably greater.
In fact, wage growth has been negative for the last 22 months. What’s more, more than 50 million Americans earn less than $15 an hour and may even have an increased tax burden when considering sales and other auxiliary taxes.
The EITC has many attractive facets and should be expanded, but given the increasing disparity between minimum versus livable wage, both policies warrant strong consideration by Congress in conjunction with one another.
Remember, low-wage jobs are still jobs and, as such, require resources ranging from transportation to child care services.
Nicholas J. Mangee is an assistant professor of economics at Armstrong Atlantic State University and can be reached at Nicholas.mangee@armstrong.edu.