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A national living wage

A national living wage
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With an election just around the corner, progressives should seize the political moment and demand that the next Congress enact a national living wage. Raising the federal minimum wage to the level of a living wage, however, is not the way to do it. Instead, progressives should steal a page from President Trump’s book and advocate a permanent payroll tax credit. Enacting a payroll tax credit, it turns out, is a necessary step toward guaranteeing a living wage for all Americans. 

To appreciate how a payroll tax credit could accomplish this task, it is important to first understand its cousin, the earned income tax credit (EITC). With $68.7 billion in payments in 2019, the EITC is the largest federal program that supplements the wages of low-income workers. The EITC is calculated as a percentage of income, and is disbursed as an annual, lump-sum payment. The credit increases with income until it reaches a maximum, then declines with further income until it completely phases out. Because the EITC is focused on families with children, the maximum credit for a childless worker is only $538, but it is $3,584 for a family with one child and $6,660 for a family with three or more children. 

The EITC is unquestionably a political and policy success. But relative to a living wage it suffers from two serious flaws. First, it requires workers to file a tax return, which leads to billions of dollars in unclaimed benefits and other costs. In tax year 2014, over five million eligible workers – a number equal to 18.5 percent of all EITC recipients – did not claim the credit, resulting in $7.3 billion in unclaimed benefits. Even when workers do manage to claim their benefits, an estimated 13 percent to 22 percent of the value of the credit go to preparation and filing fees.

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Second, the EITC takes the form of an annual, lump-sum payment, which makes it unusable for most of the year and limits its effectiveness in encouraging work. As a result, millions of workers utilize expensive refund anticipation loans to access their tax credit earlier. Because the EITC is paid in the distant future, it is less effective in encouraging individuals to join the workforce and increase their earnings, both of which are important policy goals. 

An earned payroll tax credit (EPTC) could solve both of these problems and establish a national living wage. Under the EPTC, the IRS would make biweekly payments to eligible low-wage workers, based solely on their recent payroll earnings, without any worker needing to file a tax return or involve a costly intermediary. The payment could, like the EITC, increase over a given range of earnings, reach a maximum, and then decline. Alternatively, it could start out at the maximum and decline with additional earnings. Either way, EPTC would reach 100 percent of all eligible low-wage workers whose employers make payroll tax deposits with the IRS. Self-employed workers would still need to file an annual tax return to claim the credit until a more frequent reporting scheme could be devised for them. Because the EPTC would arrive with the same frequency as a worker’s paycheck, it would provide a much more salient incentive to enter the workforce and, if the credit were structured like the EITC, increase earnings to achieve the maximum benefit.  

The EPTC would also be preferable to implementing a national living wage through the federal minimum wage. If set at an appropriate level, the EPTC would provide a living wage for all working Americans. Unlike the minimum wage, which falls directly on businesses – many of which would cut back on employment if the wage was raised to a living level – the EPTC would be funded through a higher and more progressive payroll tax. And instead of creating incentives for businesses to substitute machines or for low-wage workers or to locate abroad, the EPTC would create incentives for businesses to expand working-class jobs to take advantage of its implicit wage subsidy.  

There is a growing progressive consensus around the idea of a national living wage, motivated by the principle that anyone who works should be guaranteed a reasonable standard of living. Our federal payroll taxes go toward Social Security and Medicare, two of the signature social programs of the 20th century. It is therefore fitting that a payroll tax credit be the vehicle for advancing a national living wage in the 21st century.   

Prasad Krishnamurthy is a professor of law at U.C. Berkeley Law School.