Earned income tax credit is unifying alternative to hiking minimum wage
The unity narrative from President Biden did not appear to filter down to Bernie Sanders, who introduced recent $15 minimum wage legislation in the Senate last week and has vowed to pass it with a simple majority if it will be necessary. “If we cannot get enough Republicans to vote for this legislation under regular order, we cannot simply take no for an answer,” Sanders said. How about trying a unifying alternative?
A $15 minimum wage divides the country into winners and losers. It sets white suburban teens, who tend to keep their jobs, against disadvantaged minorities, who often lose employment opportunities. It sets corporations like Amazon, which would benefit from a wage hike to the extent it harms competitors, against small businesses whose narrow profit margins would come under further pressure. It rewards unions for their millions of dollars spent on political campaigns at the cost of employers.
The Congressional Budget Office projected that a $15 minimum wage would cost over one million jobs and reduce average incomes. Women, workers without a high school degree, and part time employees would bear the brunt of the losses. Using the same methodology, economists David Macpherson and William Even estimated that such a wage raise would destroy more than two million jobs on Main Street.
The effects of dramatic minimum wage increases on small businesses and vulnerable workers have often been discussed. But what has barely been mentioned is an alternative to minimum wage increases which delivers all the gain without the pain. It is known as the earned income tax credit. It is one of the most effective social assistance programs the country has and one of the few policies to enjoy broad bipartisan support.
The earned income tax credit supplements low income wages in the tax code, rewarding workers without punishing small businesses. Entry level workers earn a rising earned income tax credit payout as wages increase, which leads to productivity. The earned income tax credit does not have the adverse incentives of other social assistance programs such as food stamps or rental assistance that can discourage workers.
At a certain income level, depending on family, the wage subsidies taper off before disappearing entirely once incomes surpass around $50,000 a year for an employee with two kids. Yet the payout never decreases so fast as to discourage any further wage raises. Annual earned income tax credit payouts for recipients with two kids can reach about $6,000 a year. Add in state earned income tax credits, available in most of the country, and total pay increases by about several hundred dollars a month. You could even call it universal basic income for less skilled workers.
Unlike the minimum wage, the earned income tax credit targets families who need it rather than young adults still living at home. According to the Center on Budget Policy Priorities, the earned income tax credit assisted 25 million workers and lifted more than five million people out of poverty, including around three million kids, in 2018. But millions of workers sadly miss out on this pay each year since they do not know about it. Perhaps that is due to the wonky name and dearth of attention.
Increasing the payout size, as proposed by Biden, can make the earned income tax credit more useful. The earned income tax credit is currently distributed about once a year with tax refunds. Yet there is no reason why this payout cannot be broken up and credited biweekly in the federal tax withholding system. The minimum wage was never meant to be the living wage. Minimum wage jobs offer an entry point to the labor market where workers can learn what it takes to earn above $15 an hour.
A bolstered earned income tax credit combined with a robust economy that imparts workers with real skills is a much better solution than a $15 minimum wage. It can allow nearly all workers to build skills to achieve $50,000 careers that are enough to raise a family on. That is certainly a unifying goal the whole nation, even Sanders, can support.
Alfredo Ortiz is president and chief executive of the Job Creators Network.