What is the Earned Income Tax Credit (EITC), and is it an acceptable alternative to a higher minimum wage?
Since President Obama called for a minimum wage hike in his 2013 State of the Union Address, a few commentators have proposed an alternative: raising the Earned Income Tax Credit (EITC).
Wonkblog’s Dylan Matthews floated the idea during a State of the Union liveblog, and the idea has since popped up in and a authored by the research director of the conservative Employment Policies Institute. So what is the EITC, and why do some people prefer it to a higher minimum wage?
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is “a refundable federal income tax credit for low to moderate income working individuals and families,” according to the Internal Revenue Service, The amount of EITC money you can earn back depends on a few factors: your annual income, whether you’re single or married, and the number of children you can claim as dependents. The Center on Budget and Policy Priorities reports that, in 2010, “the average EITC was $2,805 for a family with children and $262 for a family without children.” As of 2012, households making under $50,300 with three or more children were eligible for EITC benefits.
Why do some people like the EITC as a policy?
Critics of traditional welfare programs argue that they reduce the incentive to find paying work, since full-time workers may become ineligible for certain kinds of welfare. This is known as the “welfare trap,” and proponents of EITC say that the policy evades the welfare trap by rewarding only those taxpayers who already have a modest income. In other words, EITC is a redistribution program that only works for those who are already working.
Why is an EITC increase supposed to be preferable to a minimum wage increase?
Opponents of a minimum wage increase argue that it raises the cost of labor such that employers will be forced to lay off workers, thereby increasing unemployment. The conservative Heritage Foundation also claims that a minimum wage increase would benefit many workers who are not in poverty, such as part-time teenage and college-aged employees. The EITC costs employers nothing and can be targeted specifically at low-wage workers who are not dependents.
But does a higher minimum wage actually kill jobs?
There’s not a clear consensus on this. An oft-cited case study of the fast food industry in two states [PDF] found “no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants.” However, the study (co-authored by Alan Krueger, now a member of the Obama administration) isn’t exactly conclusive, and other studies—such as this one [PDF] co-authored by a member of the Federal Reserve’s Board of Governors—find that raising the minimum wage does negatively effect employment.
The exact impact on employment is difficult to track for a number of reasons, and the magnitude of any possible consequences is even more unpredictable. To some supporters, raising the wage floor might be worth a slight uptick in unemployment. “After all,” writes Slate’s Matthew Yglesias, ”if you can boost earnings for a huge swathe of low-income Americans at the cost of one guy losing his job that seems like an acceptable price to pay.”
Who would be affected by a minimum wage increase?
Some teenagers work for a minimum wage, but the overwhelming majority of those who would be affected are adults. According to the Center for American Progress, 85.6% of workers directly affected by a minimum wage increase would be 20 years old or older. 59% of them would be women.
Are there downsides to raising the EITC instead of the minimum wage?
Some critics do see potential disadvantages to the EITC versus the minimum wage. The Economic Policy Instute (EPI)’s Max Sawicky points out an EITC recipient “usually does not recoup benefits from a tax credit until he or she files an income tax return the following year.” On the other hand, “a wage increase is received in real time, in each paycheck.” Additionally, “the likelihood that tax benefits will be phased out at some point means that some families with members already in the labor force and income not far above the poverty line will face rising marginal tax rates.”
EPI’s Heidi Shierholz also says that the EITC can have a “perverse impact” on the wages that employers are willing to pay by effectively subsidizing wage decreases. “Since it significantly raises the after-tax wages of many eligible low-wage workers, it may act to lower the before-tax wages paid by employers,” she argues.
Is there any reason why we can’t raise both the minimum wage and the EITC?
Not really. In fact, Shierholz thinks “the EITC and the minimum wage need each other,” since the former “substantially raises the after-tax wages of eligible workers” and the latter “puts a floor under the wages of workers ineligible for the EITC.” The only thing preventing Congress from raising both is its willingness to do so.