Sunday, September 18, 2016

Michael Saltsman On The Benefits Of The Earned Income Tax Credit Over The Minimum Wage

See Don’t Raise the Minimum Wage: Trump Has a Better Plan: Use the tax code to help working families afford child care. That’s a way to boost incomes without the unemployment side effect. Excerpts:
"The EITC, signed into law by President Gerald Ford in 1975, has for decades been championed by Republican and Democratic presidents alike. The word “credit” is a misnomer; the policy is better described as a wage supplement for low-income employees, topping up their income on a sliding scale. 

To be eligible for the EITC a person must hold a job and earn income. The size of the annual payment depends not on tax liability, but on how much the employee earns and how many children he or she has. Payments phase out gradually as income rises, to avoid the counterproductive “cliff” effect that characterizes other social-welfare programs.

Economists have found much to like about the policy: A 2008 study, supported in part by my organization and published in the Journal of Policy Analysis and Management, found that when the credit has been expanded in the past, employment of single mothers rose. So did their wages. Mr. Trump would build on this success by further expanding the credit to help cover eligible child-care expenses. The maximum supplement under his plan would be one-half the amount of the employee’s payroll taxes (i.e. FICA and Medicare). For married couples, the maximum would be calculated from the lower-earning spouse."

"What’s the cost for this wage boost? EITC benefits totaled roughly $66 billion in tax year 2014, and Mr. Trump’s proposal would add to this amount. (His campaign suggests it would be offset by eliminating waste and fraud in the unemployment insurance program.) Still, a partial wage subsidy from taxpayers is far better than the alternative—a 100% wage subsidy to workers who can’t find a job after the minimum wage is raised.

If you don’t believe me, ask the economists: A 2015 University of New Hampshire survey commissioned by my organization asked 166 American labor economists for their opinion on the best policies to reduce poverty. More than 70% identified the EITC as a very efficient means; only 5% said the same thing about a $15 minimum wage."

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