Finance

Is Increasing the Minimum Wage a Good Way to Alleviate Poverty?

Wage hikes have become the highest-profile antipoverty proposals in states and localities. But some advocates say boosting the Earned Income Tax Credit would be better for the working poor.
by | March 2014
Protesters rally for better wages in Detroit.
Protesters rally for better wages in Detroit. AP/Paul Sancya
 

Last Updated March 5 at 11:00 a.m.

President Obama is making a stop in Connecticut today to push for raising the federal minimum wage. The proposal appeared in this year's State of the Union and again in yesterday's release of the White House budget for fiscal year 2015. But the bigger news in the budget was Obama's desire to expand the Earned Income Tax Credit, particularly for working adults without dependent children.

The following article, which examines why some economists and advocates for the poor say tax credits deserve at least as much attention as wage hikes, was originally published in Governing in March 2014.

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Federal policymakers remain locked in debate over whether to increase the minimum wage, despite (or because of) President Obama’s recent executive order raising minimum pay for government contractors. But among states and localities, wage hikes have become the highest-profile antipoverty proposals on the table. Wage increases took effect in 13 states on Jan. 1. Some cities and counties, including San Jose, Calif., and Montgomery County, Md., have enacted their own wage raises. And lawmakers in at least 30 states are expected to push for minimum-wage increases this year.

But what about tax credits? Some advocates say that boosting programs such as the Earned Income Tax Credit (EITC) would be better for the working poor. Such proposals, however, haven’t garnered the same kind of attention as raising wages. “The minimum wage is a little more intuitive. It’s a little easier to explain,” says Nick Johnson, vice president for state and fiscal policy at the Center on Budget and Policy Priorities (CBPP), a left-leaning think tank. That’s why, he says, the minimum wage has become “the public face of the effort.”

Historically, the EITC has enjoyed bipartisan support. Originated in 1975, the program provides an annual supplement to workers based on their earnings, marital status and how many children they have. Thanks to policy changes over the years, both the value of the credit and the number of Americans receiving it have more than tripled since the EITC was created. More than 25 million tax filers participated in the program in 2011, and as of last year, a married couple making less than $51,567, with three or more children, could receive a credit of $6,044.

Twenty-five states, plus New York City, the District of Columbia and Montgomery County, Md., have doubled down on the program by matching a proportion of the federal credit someone receives. The size of the state percentage match ranges from Louisiana’s 3.5 percent to Vermont’s 32 percent. Last year at least 16 states considered legislation that would either create, expand or retain a state version of the federal credit, according to the National Conference of State Legislatures.

Lately, expanding the EITC has become a rallying cry among some moderate conservatives who say raising the minimum wage will hurt employers and result in layoffs. EITC proponents include U.S. Rep. Paul Ryan of Wisconsin; the American Action Forum, a center-right think tank; and Gregory Mankiw, a former chairman of the Council of Economic Advisers under President George W. Bush, who says “an expanded EITC would make sense as part of a package that eliminated the minimum wage, rather than raising it.”

Mankiw’s point is precisely the problem, say some antipoverty advocates. “Both are good public policies,” says Amy Hanauer, executive director of Ohio Policy Matters, a think tank that successfully pushed for the creation of a state version of the EITC last year. While the two policies complement each other, people use the benefits differently. The minimum wage provides a small income boost each month—well suited for ongoing costs, such as food, utilities and rent. The tax credit, by contrast, comes in an annual lump sum, which works better for paying off debt or a rental deposit.

“The problem you get into is people who say we don’t need both, [that] we should have one or the other,” says Jared Bernstein, a senior fellow at CBPP. “I don’t think there’s a perfect calibration, but I think there’s a balance between the two.”

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