Wage Based Tax Credit | GatewayJobs.com

he federal earned income tax credit (EITC) is the most successful federal anti-poverty program in existence. Started in the late 1970s, the credit was originally intended to reimburse low-income working families for their payroll tax (FICA) contribution. In 1993, the credit was expanded to serve as the nation's largest assistance program. Despite this success, the EITC could be improved by targeting its assistance towards low-income families supported by low-wage, high work-effort family heads.

Currently, a parent earning $7 an hour, working full-time, receives the same benefit as an employee earning $21 an hour but only working a few hours a week. This is neither fair nor logical in a welfare policy. The system should not reward those with high hourly wage rates who choose not to work. With a limited pool of dollars, assistance should be focused on those employees who may have few skills and low wages, but who work full-time.

A recent paper by Drs. Thomas MaCurdy and Frank McIntyre of Stanford University and Brigham Young University proposes an alternative to the EITC that would reward work effort by switching the focus from earnings to wages, through a Wage-Based Tax Credit (WBTC). A WBTC encourages high-wage employees to work more hours and grants a majority of benefits to low-wage families. Currently, the federal government spends over $35 billion a year on the EITC.

Putting the same amount of money into the WBTC would increase the benefit to the average low-wage employee by over 37%. A WBTC would guarantee low-wage families earn at least $6.50 an hour and provide the average low-wage individual with an additional supplement of over $2,000. Full-time minimum-wage family heads would increase their effective wage up to $8.50 an hour. This plan would distribute the majority of benefits to families supported primarily by a wage of $7 an hour or less.