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Jeannette Wicks-Lim: The Earned Income Tax Credit (EITC) is no substitute for a higher minimum wage

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

Millions of people go to work every day in America and don’t earn enough to survive. If you make minimum wage, you’re making about $15,000 a year. That’s certainly barely enough for an individual. But if you’re a single parent with a child or two, it’s an impossible level of income for any kind of proper living. Now, some people suggest as an argument against raising the minimum wage, well, why do you need it? There’s something called the earned income tax credit, and that will look after such situations without putting undue pressure on small businesses. Well, a new study points out, well, it ain’t working.

Now joining us to talk about this is Jeanette Wicks-Lim. Jeanette is a assistant research professor at PERI institute at the University of Massachusetts Amherst, and she co-authored a recent study with Bob Pollin, who’s the codirector there. Thanks for joining us, Jeanette.


JAY: So let’s start with the basic facts. What is the situation in terms of people living on minimum wage? And especially we know single mothers are most affected by all of this. And what is the earned income tax credit supposed to achieve?

WICKS-LIM: Let’s go back to the figure you just mentioned about $15,000 of annual income from the minimum wage. That’s based on the federal minimum wage rate, which is currently $7.25. So if you’re working year-round, full-time, earning the $7.25 minimum wage, you’d be making about $15,000. So that’s what minimum wage, the federal minimum wage gets you.

Now, the earned income tax credit is an income subsidy for low-income workers, and basically it’s determined by taking the earnings that you have and giving your fraction of that back in either tax rebates or tax relief. You know, for low-income workers, often what they get is a tax rebate, which means they’d actually get cash back in the mailbox that gives you some cash assistance. So, going back to the $15,000, if you’re earning the federal minimum wage rate and you’re working full-time year-round, you get something on the order of about $5,000 in the earned income tax credit if you have a couple of dependents. So, you know, the most generous benefits is what I’m referring to, and those go to households with at least a couple of kids.

JAY: Yeah, and to qualify you need children. This really is directed at families, not individuals, right?

WICKS-LIM: Yeah, it’s a program primarily to support households that have dependent children. That’s where you get the biggest benefits from. But you know.

So if you take these two things together, if you take $15,000 from earnings, minimum wage earnings, and you add to it the federal EITC credit of $5,000, you’re talking about an annual income of about $20,000. Now, if you compare this to what I would call a reasonable definition of what’s a minimally decent level of income to support family, a family of one adult and two kids, that income threshold is about $40,000. So if you compare what you’d get from minimum wage earnings plus the EITC, the federal EITC, and compare that to this, you know, minimal income level that you need to support a decent living standard, you’re talking about having about half of what you need. So you’d be able to cover half of your basic needs.

JAY: And just quickly, where did that $40,000 number come from?

WICKS-LIM: So that $40,000 figure comes—it’s based on the Economic Policy Institute’s basic family budget income thresholds. And what they do is they go around the country and they try to add up what are the basic living costs for families that are raising young children, and they only add up, you know, like the title of the income threshold, the basic needs, so housing, energy, transportation, child care, some personal care items. But no, they don’t account for any kinds of savings. So you’re not saving any money for education, retirement. Or even if you have an emergency, you have no savings set aside to deal with, you know, to cope with, you know, a car breaking down or a medical emergency that may come up. So it’s really just to cover the basic needs.

JAY: So best-case scenario now if you have a kid or two is—and with the tax credit, which is cash back if you’re not paying taxes, is maybe you make $20,000. So there’s been campaigns right across the country in many, many cities to raise the minimum wage. And employers and opponents of this campaign often argue, well, there is this earned income tax credit; why do you need to raise the minimum wage? So what does your study show?

WICKS-LIM: So, well, this is the reason why we got into this research question in the first place is that we had heard this comment or this argument against the minimum wage and against living wages often, that the earned income tax credit is actually a better policy, that they should substitute minimum wage laws or living wage laws and we don’t need them; we can just rely on the earned income tax credit. And the first thing I just want to point out is, you know, what we have just been talking about. When you look at what the earned income tax credit is, combined with minimum wage earnings, that by itself—I mean, you know, a federal minimum wage of $7.25—that by itself is nowhere near what a family would need to support itself. So, you know, given the current rates, the EITC certainly doesn’t support a decent living standard for low-income workers.

Now, the main argument that’s made against the minimum wage laws by these folks who would rather use the earned income tax credit is, you know, what you just said, that it puts undue pressure on employers ’cause they have to pay higher wages. So there are two basic problems that we find with this. First, you know, we’ve been studying the minimum wage laws in these countries—in this country for a long time, you know, looking at state-level minimum wage laws and also living wage laws, and we haven’t been finding that there’s this significant negative employment effect that the opponents of minimum wage laws often argue with. So there doesn’t seem to be this negative impact of these minimum wage laws. And we do find that earnings go up for low-wage earners. So there is a benefit from having these minimum wage laws.

Now, the other worry is that—if you only rely on earned income tax credit, is that you’re then shifting the burden from low-wage employers to taxpayers to provide for the basic needs of workers. So you’re basically shifting all the responsibility from private employers onto the taxpayer, which can have a disincentive for employers to raise their wages in the first place, that is, it could support low-wage employers to continue to pay very low wages. And so you have this problem where, you know, as you increase or expand the EITC, you could then see that low-wage workers’ wages tend to grow more slowly or even go down. And so that’s a worry with expanding only the EITC and not also strengthening the minimum wage.

So you can see how these two policies can actually work well together. You know, you may may want to rely on an expanded EITC. And, in fact, that’s what we argue we do want to do.

JAY: What minimum wage or combination of minimum wage and EITC does one need to get families closer to that $40,000 mark?

WICKS-LIM: With this report what we want to do is just to look at what have the states experienced in terms of trying different minimum wage rates and trying different state EITC programs, you know, ’cause states have their own program that sort of piggyback on the federal EITC program, but many states add their own benefit to the federal benefit. So we just wanted to look at the experience of states to see, well, what can we see from what states have actually done, how have these programs benefited or not benefited low-income workers. And we look specifically at single mothers and single mothers with a high school degree or less, because this is the social group in the United States that’s going to be most impacted by these two policies. And what we found was that the best boost, the largest boost in earnings and income came when states had both a high minimum wage and a high state EITC.

Now, currently what you have in terms of a high minimum wage, you know, a relatively high minimum wage and a relatively high state EITC rate is something on the order of, like, $9 when we’re talking about Washington’s minimum wage and something on the order of about 40 percent state EITC rate in Washington, D.C. Now, you know, when you go on and actually look at how does that compare to what families actually need, even in the case of these relatively generous programs that exist today, those are quite low, I mean, the achievable income is quite low.

And so, in this other report that I co-authored with a colleague of mine, Jeffrey Thompson, what we tried to do is we tried to look at, well, how high could we raise these rates, that is, for the minimum wage and for the EITC, in order to get somewhere near a decent living standard based on full-time year-round work. And what we found was that with the minimum wage we found that you could raise the minimum wage 70 percent. And we tried to bind these rates by what’s sort of economically feasible. So, in terms of the minimum wage, what we found was you could raise the minimum wage about 70 percent. That would get you to about $12.13. And that plus that minimum wage earnings would actually get some households near a decent living standard. Then we had to consider also what would happen, what we could do with EITC, because that could add a benefit on top of that. And we considered expanding the federal EITC program by raising its benefit level by about 80 percent and then expanding out the households who are eligible for that benefit. You know, right now, the federal EITC program only gives income subsidies to families that have incomes less than $50,000 per year. And when you get even close to $50,000 per year, then you’re looking at very, very small EITC benefits. We were able to find that something on the order of 60 percent of low-income working households would actually be able to achieve a decent living standard if we expanded out programs by that amount.

JAY: And what would that cost—if that’s a federal program, or a combination of state and federal, what would be the total cost for that?

WICKS-LIM: We looked specifically at the federal level, because that was where we could imagine being able to expand the EITC program the most, since the federal government has the strongest revenue-generating powers relative to the states. And what we found was it would have about doubled the cost of the program. So if you’re looking at about $60 billion, well, at the time that we did the study it was somewhere on the order of about $50 billion in cost. That would be doubled to about $100 billion. We looked at what the taxable income was for high-income households, relatively high income households, households that make about $100,000 or more per year, and what we found was those households, as many people have been talking about, their incomes have been rising more rapidly than the average. And if you took just one year’s worth of their income growth and used that amount of tax revenue, the tax revenue that would come from that, then you would actually be able to pay for this doubled-in-size cost for the EITC.

JAY: Okay, break that down a little more. How are you getting those figures?

WICKS-LIM: Their income has been growing about—a little bit over 1 percent year to year. So if you took the revenue that was equal to about that growth, if you took [crosstalk] tax revenue equal to that.

JAY: That 1 percent growth. Essentially, 1 percent of the—people over $100,000 income would pay for this.

WICKS-LIM: Right. Exactly.

JAY: As one option. I mean, I suppose there’d be other ways to raise revenue, but that’s one option. Okay. So let’s just get back to the main argument again. So what would be the employment repercussions, then? Is there some modeling what happens to the argument small businesses give that if we have to start paying, you know, $12 to $13 an hour, we’re going to either start laying people off or we’re going to go out of business?

WICKS-LIM: What we’ve—have found in the more recent research and in very high-quality research is that current minimum wage rates have not produced the significant employment losses that, you know, these small businesses and employers are often saying is the consequence of these kinds of laws. So, you know, working from that basis that—you know, basically, the empirical research shows that there isn’t this, you know, large negative employment effect.

Then the question becomes: well, you know, how high can you raise the minimum wage and—you know, before you start seeing these new job losses? So that’s the question we explore is we say, well, okay, so what are the actual costs to employers, for one. We really look carefully at the restaurant industry, because that’s the industry that is most affected by minimum wage increases. The cost to employers is quite modest. When you compare the cost increase of different minimum wage hikes to the revenue that these businesses are bringing in, it’s a relatively small amount.

So what I mean by that is, say if you take a 70 percent minimum wage increase, which is what we found was economically feasible, then we’re looking at something on the order of 3 to 4 percent of sales revenue in terms of what the cost is. So you’re looking at, like, a $20 meal being raised about, say, 4 percent. And so you’re talking about a $20 meal going up to $20.80. Very often when a minimum wage goes up, they do in fact raise their prices to cover some of the cost. They also find that when the minimum wage goes up, that the workers that get the raises, their productivity rises. So some of the cost is actually offset by the fact that workers are working more productively. And then, finally, when businesses are operating in an economy that’s growing at a healthy pace, what they find is their revenue goes up over time because the economy is doing well. You know, when people are making more money, they spend more money, and in restaurants in particular, when they’re—households are earning more income, they can spend more money at restaurants. And so restaurants see the revenue grow because the economy’s growing. And in those various ways they can cover the additional cost of minimum wage hikes without having to resort to laying off workers.

JAY: Alright. Thanks very much for joining us, Jeanette.

WICKS-LIM: Thanks.

JAY: And thank you for joining us on The Real News Network.


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Jeannette Wicks-Lim is an economist at PERI, the Political Economy Research Institute. She completed her Ph.D. in economics at the University of Massachusetts Amherst in 2005. Wicks-Lim specializes in labor economics with an emphasis on the low-wage labor market and has an overlapping interest in the political economy of race. Her dissertation, Mandated wage floors and the wage structure: Analyzing the ripple effects of minimum and prevailing wage laws, is a study of the overall impact of mandated wage floors on wages. Specifically, she provides empirical estimates of the extent to which mandated wage floors cause wage changes beyond those required by law, either through wage effects that ripple across the wage distribution or spillover to workers that are not covered by mandated wage floors. Jeannette regularly publishes commentary in Dollars & Sense.