Helping Low-Wage Americans – Wage Based Tax Credits: A New Solution to an Age Old Problem

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Sixty-five years ago, pharmacies stocked mercury, heroin, and radon as remedies; few people believed that a fungus-based drug called penicillin could cure anything; and the minimum wage was considered our most effective anti-poverty policy. Doctors prescribing mercury today would lose their license, yet the popularity of similarly counterproductive minimum wage increases endures—despite the existence of successful anti-poverty measures such as the federal Earned Income Tax Credit (EITC).

The near-universal conclusion of decades of economic research is that minimum wage increases diminish total employment and destroy opportunities for entry-level employees. Moreover, most of the benefits associated with minimum wage hikes accrue to non-poor families. The EITC, in contrast, increases poor Americans’ income and work-effort, without destroying job opportunities. Despite these well-documented realities, impending national elections—coupled with the superficial appeal of minimum wage increases—will once again lure lawmakers into promoting one of our least effective anti-poverty programs. But there is a better way.

The Employment Policies Institute proposes a WBTC modification to the current federal EITC as a superior alternative to a minimum wage increase. The modest reforms required to create WBTC would make it a powerful tool to supplement the income of low-skilled working Americans. The WBTC will increase the effective wage of a full-time minimum wage employee with one child to $7.75 an hour. Employees with two children will receive $8.50 an hour. The average low-wage employee will receive 37% more benefits with a WBTC than under the current EITC. In addition to providing more benefits to those who need it most, a WBTC will cost less than the current EITC without the job-killing effects of the minimum wage.