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A Better Way to Raise Incomes

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A Better Way to Raise Incomes

The New York Times July 6, 2016
EconomicsIncome Inequality

In this campaign season, politicians across the country (including the presumptive Democratic presidential candidate and perhaps even the Republican one) have called for raising the minimum wage. Not just marginally, as in the past, but all the way to $15 an hour, more than double the current national level of $7.25. Even elected officials and candidates in states with higher minimum wages like New York have jumped on the $15 an hour bandwagon. Their justification: “You can’t support a family on the current minimum wage.”

By allowing wages to reflect local economic and industry conditions, the earned-income tax credit makes it possible for all unskilled workers to have jobs...

What the advocates fail to acknowledge is that minimum-wage workers with families to support are already eligible to receive a financial boost under a national program called the earned-income tax credit. This program, instituted in 1975 and expanded since then, paid benefits to 27.5 million low-income workers in 2014. (That same year, only three million workers fell at or below the federal minimum wage, so the credit also helped millions of other low-wage workers.) Technically, such payments are classified as “refundable tax credits,” paid to qualifying workers when they file their annual income tax returns.

Take as an example a single mother in New York supporting herself and two children, earning $9 per hour (the current state minimum) and working 2,000 hours a year. She is entitled to an annual income supplement of up to $5,572, which would bring her combined income to $23,572, the equivalent of earning $11.79 an hour. If she had three children, the earned-income tax credit would raise her total income by as much as $697 more, to $24,269, equal to an hourly wage of $12.13. (These income supplements will be larger in future years because the tax credit is indexed to inflation.) If her household had other sources of income, the credit would be proportionately less; or if she had no dependents at all and was under 25, she would be ineligible.

That is the beauty of the tax credit; it helps low-skilled workers in proportion to their household need, taking pressure off the minimum wage as the only guarantor of a “living wage.” The credit thus performs a crucial function in a national labor market where one size most definitely does not fit all, a labor market that is enormously varied by region, by employers’ needs, by workers’ skills and by the potential for jobs to be replaced by technology. By allowing wages to reflect local economic and industry conditions, the earned-income tax credit makes it possible for all unskilled workers to have jobs — including those not eligible for the credit, like teenagers, single young adults or semiretired older people, who would otherwise be priced out of the labor market by an unrealistically high minimum wage.

There is, however, one crucial aspect of the tax credit: You have to be working to receive it. Economists disagree as to how many low-income jobs will be lost when the minimum wage is raised...

Read the entire piece here at The New York Times

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Peter D. Salins is a senior fellow at the Manhattan Institute

Photo by K-Kwanchai / iStock

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