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A False Choice: Earned Income Tax Credit or Minimum Wage Increase

03/24/2014 02:41 pm ET | Updated May 24, 2014

The release of the Congressional Budget Office (CBO) study, The Effects of a Minimum Wage Increase on Employment and Family Income, in mid-February created a brouhaha within and around the Beltway. In our opinion, however, the study brought more heat than light about what to do to address the economic needs of those in low income families and low wage workers.

That's because the study itself became the story as its methodology and conclusions were debated by those in the economic community and its findings were brandished about as supporting evidence by those on both sides of the minimum wage increase argument.

The study evoked two primary responses from those opposed to a wage increase: (1) A wage increase would be a "job killer" and should be avoided at all costs. (2) An enhanced or revised Earned Income Tax Credit (EITC) would be a more "market friendly" and better way to respond to those in economic need rather than a wage increase.

Call us skeptics but we are not convinced about the "job killing" aspect of a wage increase. For every study supporting this thesis, there appears to be an equal and opposite study rejecting it.

Even the CBO, after projecting that "...the $10.10 option would reduce total employment by about 500,000 workers..." goes on to qualify its assertion by stating "...there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers." We guess that means there is a one-third chance that the wage increase would have a positive effect and increase employment. Go figure!

It seems that we have entered the realm of speculation and conjecture -- maybe it's not quite as hypothetical as: "How many angels can dance on the head of a pin?" But, it is certainly an arena in which the limits and boundaries of predictive economic modeling are being stretched considerably.

This brings us to the EITC as an alternative to a minimum wage increase and something about which we are convinced. That is, as we wrote in a blog last summer, "...the choice between an enhanced EITC and an increased minimum wage is a false one."

EITC or minimum wage increase: A false choice then. A false choice now.

As we noted earlier, drawing upon a blog by Jared Bernstein, these policies reach two different target groups. The EITC is a "wage subsidy for low wage earners in low income households." In contrast, a minimum wage increase would reach a much broader group of working poor and lower middle class that would not qualify for the EITC.

There are currently a number of proposals being floated that would deal with the "target group" problem somewhat. President Obama's new budgetpresents an ambitious expansion of the EITC by approximately $60 billion over a decade by taking actions such as dropping the eligibility age to 21 from 25 and doubling the credit for childless workers from $500 to $1,000. It is estimated that this will benefit approximately 13.5 million additional Americans.

House Ways and Means Chairman Dave Camp (R-MI) has set out a tax reform proposal that would replace the EITC with a payroll tax exemption up to $4,000 that would cover more people. Senator Marco Rubio (R-FL) has recommended replacing the EITC with monthly wage subsidies that would go to more citizens as well.

The catch to both of these approaches is that they would either spread the same amount of money over a much larger pool of recipients, thus reducing the benefits to low income working families (Rubio's plan), or significantly reduce the size of the EITC program over the next decade (Camp's plan).

In spite of these differing proposals, the common point of agreement is that it makes sense to extend the coverage of the EITC -- or something like it -- beyond its current focus on low income families to low income wage earners in general.

This is absolutely necessary given these trying economic times for far too many Americans. It is in no way sufficient, however, to address the circumstances confronting the low wage worker -- especially if there is not a funding increase commensurate with the increased number of program participants.

The bottom line is that the bottom line for the low wage worker today is abysmal. As Robert Greenstein, President of the Center on Budget and Policy Priorities (CBPP) points out, "At $7.25 an hour in 2013, the minimum wage is 21 percent below its 1968 level, after adjusting for inflation." According to an Economic Policy Institute study, the minimum wage when adjusted for inflation is worth $2 less in 2013 than it was in 1968.

An enhanced or expanded EITC would do nothing to change that fact. That is why we need to raise the minimum wage too. As we wrote earlier, "This should not be either/or. It should be both/and."

The CPBB has been advocating for the EITC and an adequate minimum wage as "twin pillars of an effective make-work-pay strategy since the 1990's." Putting both those pillars into place was important at that point in time, it is critically important now.

In its Minimum Wage Increase study, the CBO states that the EITC as it exists today would be a better tool to "boost the resources of low-income families" than a minimum wage increase. That's because according to the CBO "an increase in the EITC would go almost entirely" to them. While "a minimum wage increase would add to the resources of most families of low-wage workers, regardless of the families' income..."

The CBO's finding on that narrow trade-off question about "low income families" is correct. But, we are at a juncture currently, as the discussion about revising the EITC shows, where the perspective should be broadened to include low income families and low wage workers.

More importantly, the low wage policy paradigm needs to be shattered. Joshua Freedman and Michael Lind of the New America Foundation make a powerful and persuasive case for this in their paper, Beyond the Low Wage Social Contract, released in September 2013.

In the United States today, 3.6 million people or 4.7 percent of the hourly rate work force earn the federal minimum wage or less. 16.5 million earn less than the $10.10 federal minimum wage proposed by President Obama -- that's almost 22 percent of the work force.

And, the composition of the low wage work force is changing. It's older, more diverse and more educated than it was thirty years ago. As the New York Times highlights in a recent editorial, "...since 2000, many college graduates have taken jobs that do not require college degrees and, in the process, have displaced less educated, lower-skilled workers."

These are trying and exceedingly difficult times for the entire spectrum of American hourly low wage workers. That's why we don't need a false choice between the EITC and a minimum wage increase. That's why we also don't need a Hobson's choice of only a changed EITC.

What is needed is a blended solution that meets the myriad and differing conditions of low income families and low wage workers of all types. That blended solution is a meaningful increase to the minimum wage and a measurably enhanced and expanded EITC.

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