Research & Commentary: Earned Income Tax Credit vs. Minimum Wage Laws

Published June 19, 2012

The Earned Income Tax Credit (EITC) and minimum wage laws have been two of the primary mechanisms the federal and state governments have used to help low-income families move out of poverty. A debate is currently ongoing in many state legislatures and Congress over which of these two policies is more effective and should be expanded. Recent studies have shown the EITC to be more effective.

The EITC is a refundable tax credit for lower-income working individuals and families. The amount of the credit is based on income level and the number of dependents the applicant supports. When the credit exceeds the amount of taxes owed, a payment is issued to those who qualify and claim the credit. According to the Census Bureau, the EITC is the largest poverty reduction program in the United States, with around 21 million American families receiving more than $36 billion in payments through the EITC in 2004. It is designed to increase employment, stimulate spending in the economy, offset the burden of Social Security taxes, and encourage existing workers to stay employed.

Minimum wage laws mandate a base level that employers are required to pay certain covered employees. Supporters of these laws argue they protect workers from exploitation by employers and reduce poverty.

Opponents of minimum wage laws say these artificial wage hikes increase unemployment and poverty. Russell Sykes of the Empire Center for New York State Policy argues the EITC is more effective than increasing the minimum wage and overcomes many of its flaws. He notes, “It [the Earned Income Tax Credit] doesn’t lead to job loss, it doesn’t deter hiring, and, since it penetrates to about 80 percent of [low-income] working families with children, it already raises the effective minimum wage for a mom with two kids from $7.25 to $10.44 an hour.”

Michael Saltsman, a research fellow at the Employment Policies Institute, says, “University of Alabama and East Carolina University economists have found that 2.5 times more Americans would have been lifted out of poverty if there had been an expansion of the federal EITC between 2007 and 2009 instead of an increase to the minimum wage. Additional research shows that every 10 percent increase in a state’s EITC supplement is associated with a one to 1.5 percent increase in employment for single mothers.”

The following articles examine the Earned Income Tax Credit and minimum wage laws from multiple perspectives.

Making Work Pay in New York: The Earned Income Tax Credit
Russell Sykes of the Empire Center for New York State Policy explores the history and impact of the EITC, compares its effectiveness as a poverty-fighting measure to the minimum wage, and identifies areas where the EITC could be improved.

Using the EITC to Help Poor Families: New Evidence and a Comparison with the Minimum Wage
David Neumark and William Wascher evaluate the effects of the EITC on poor families. Exploiting state-level variation in EITCs, they found the EITC helps families rise above poverty-level earnings. This occurs by inducing labor market entry in families that initially do not have an adult in the workforce. Their results suggest the EITC is more beneficial for poor families than is the minimum wage.

Earned Income Credit Better for Working Poor than Minimum Wage
Ian Mason interviews Russell Sykes of the Empire Center about the EITC and how it may be better for the working poor than minimum wage laws. Sykes also discusses why efforts to expand the EITC have failed and provides advice to legislators considering new reforms.

Minimum Wages and Poverty: Will the Obama Proposal Help the Working Poor?
Richard V. Burkhauser and Joseph J. Sabia examine the effectiveness of minimum wage increases in reducing poverty. They argue that if policymakers are truly interested in helping the working poor, they should concentrate on polices such as the EITC that directly help the working poor without disrupting the underlying labor market and abandon politically popular but ineffective anti-poverty measures such as the proposed minimum wage increase.

Living Wage and Earned Income Tax Credit: A Comparative Analysis
Writing for the Employment Policies Institute, Mark Turner and Burt Barnow argue “living wage” laws are vastly less efficient than localized Earned Income Tax Credit programs.

Minimum Wages, the Earned Income Tax Credit, and Employment: Evidence from the Post-Welfare Reform Era
Neumark and Wascher study in this paper the effects of minimum wages and the EITC in the post-welfare reform era.

Ten Years of the EITC Movement: Making Work Pay Then and Now
Steve Holt of the Metropolitan Policy Program at the Brookings Institution discusses why the Earned Income Tax Credit is important for America’s working families, arguing it encourages work and reduces poverty.

The Effects of the Earned Income Tax Credit and Recent Reforms
Bruce D. Meyer of the University of Chicago examines the EITC and its effectiveness along with some problems with the program and recent reforms. The evidence indicates the income distribution features of the EITC work well, he concludes: “The credit targets resources at those below the poverty line, particularly families with children. It raises more than 4.0 million people above the poverty line. While it is especially aimed at people around the poverty line, it also raises 1.4 million people above half the poverty line.”

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If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].