Monday, June 26, 2006

The Problem with Minimum Wage Laws

I finally got a response from David Sirota's apologists over at the Working for Change website regarding (1) my suggestion that campaign contributions be taxed and (2) my claim that the Earned Income Tax Credit (EITC) is a more effective vehicle for helping the working poor than the minimum wage. Strangely enough, no opposition has yet surfaced to my proposal to tax campaign contributions. However, my assertion regarding the effectiveness of the EITC is being challenged by the age old question, "Where's the money going to come from?"

To be clear: The effectiveness of the EITC is not in doubt, and most people seem to agree that giving the working poor a break on their income taxes is a GoodThing(TM). However, the dialogue reaches an impasse when an advocate of the minimum wage asserts that a raise in the minimum wage would put more money in the hands of the working poor than the EITC ever could. Of course, this begs the same question that was asked of me, "Where's the money going to come from?"

In an article published on the Slate website on July 9, 2004, Steven Landsburg convincingly argued that there's less and less empirical evidence to suggest that raising the minimum wage will hurt minimum wage workers. Indeed, as a general rule, an increase in the minimum wage will be very effective at transferring wealth from employers to employees. However, the problems with this transfer of wealth are the facts that (1) over two-thirds of minimum wage workers are not living in poverty and (2) the financial burden of helping the working poor is placed on a very small group of people -- i.e., their employers.

"If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion. ┬ÂThe minimum wage is nothing but a huge off-the-books tax paid by a small group of people, with all the proceeds paid out . . . to another small group of people."


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13 Comments:

Blogger Trevor said...

I'm not sure I would agree the "most people" feel the EITC is a good thing.

I certainly do not.

In fact, I don't think personal income taxes in general are acceptable. But if we must have them, they should be level across the board.

5:02 AM, June 29, 2006  
Blogger Litwin said...

I think you raise some good points here. I agree that increases to the minimum wage or the EITC raises similar "funding" questions--while at the same time very different questions.

But if we are dicussing opposition, it seems to me that the past decade or two has shown so much less opposition to EITC increases than to minimum wage increases. Any votes for the path of least resistance?

Another consideration, of course, lies in the national v. state reality that we have in this area. While there are state EITCs that do have a financial impact for many workers (and even a couple "local" EITCs), the main thrust of the EITC is national while most Americans working for the minimum wage are subject to state minimum wage laws (even where some of those states use the same amount as the feds). In that sense, the federal minimum wage becomes something more symbolic than financially significant to many of our poorest workers.

Finally, I appreciate your comment at my blog and plan to be back to read much more of yours here.

9:19 AM, June 29, 2006  
Blogger dday said...

Read and disgested. I would say that the insistence on the efficacy of tax credits baffle me. A one-time payment in April is nothing compared to a consistent annual increase in salary, even if that money is exactly the same amount. The opportunity cost of the EITC is pretty great. Furthermore, while I don't advocate repealing the EITC, raising the minimum wage would actually raise federal revenue, at least in payroll taxes, while expanding the EITC would lower it. I believe a combination of both is acceptable.

10:26 AM, June 29, 2006  
Blogger Litwin said...

Reading dday's comment helped me remember one more advantage to wage increases over EITC increases: pride. Reading into the views held by recipients (or potential recipients) of the EITC, one is left with the distinct impression that recipients consider the EITC a handout. A higher wage brings a more content, more productive worker and member of society. The EITC is a brilliant concept but cannot quickly reverse the view deeply held by so many Americans that an hour worked should mean an hour paid.

8:39 AM, June 30, 2006  
Blogger Geo said...

I agree with jml: doesn't the earned income credit sort of put people in the category of the poor whereas people earning decent wages leave the category "poor" and enter the category "gainfully employed"? So, to put it in conservative terms, don't we need to get people off of welfare and into work that lifts them from poverty and restores their self worth? Also, what about health care? Does the earned income tax credit also offer health care?

What about an idea that was mentioned in the 60s and 70s, even by Nixon (I think), that there ought to be a guaranteed national income and that anyone falling below that income would be compensated by the federal government to lift his wage to that income level? Of course that would be a great negative incentive for business to raise wages, wouldn't it?

Nothing's simple, is it?

6:57 AM, July 01, 2006  
Blogger jj mollo said...

"The minimum wage is nothing but a huge off-the-books tax paid by a small group of people, with all the proceeds paid out . . . to another small group of people."

Whereas the EITC is a subsidy, paid by all, for these businesses that hire people at subsistence wages. One commenter on his site mentioned that a lot of people don't even file their income taxes to get the refund. Now why do you suppose that is?

My contention is that minimum wage workers are at a disadvantage on negotiating for salary, often lacking information, flexibility and self-confidence. Sometimes they are held up by extortionary pressures. Any "taxation" effect of the minimum wage goes partially to make up for the free ride that these businesses have been getting on the backs of low-wage workers.

Hiring the euphemistically designated "undocumented workers" is also a subsidy, paid for out of the pockets of the poor and at the expense of the Shared Commons, which belongs generally to the citizens of the US. I object to such pilfering.

12:27 PM, July 03, 2006  
Anonymous Anonymous said...

Again you see many pundits promoting the EITC not realizing that many of the working poor don't file income taxes to begin with - so they don't access this 'benefit' - how do I know? Having worked in the division of food stamps/medicaid for the state I'm in, one form of income verification is your most recent tax return - many don't have one. So let's stop looking at how to help the poor from the viewpoint of middle class America, because we will never ever understand poverty. My clients wanted the cash - they wanted the money on their pay so they could survive in the present.

7:58 AM, July 08, 2006  
Blogger Vivian J. Paige said...

Thanks for commenting on my blog.

Let me mention one aspect of the EITC that you may or may not be aware of: the advanced EITC. This allows employees who anticipate qualifying for the EITC at year end to receive a portion of the credit during the year as a part of their paychecks.

Few people are aware this option exists and even fewer take advantage of it. Why? Because the largest employers are small businesses who have no clue the option exists or, if they do, don't want to mess with it.

As to your issue: while I believe an increase in the EITC is an easier path, I don't believe it is as effective. Since the large majority of EITC recipients receive the money in the form of a lump sum payment in April, this does not help them attain a higher standard of living during the year. Increasing the minimum wage accomplishes that.

7:57 PM, July 08, 2006  
Blogger Tony said...

One commenter listed as a reason for favoring minimum wage hikes (at least over EITC) is for "pride".

I would suggest reviewing exactly WHO earns minimum wage. Once you have whittled that down to the scant few that are not students, dependents or earning more in tips/commissions than wages you can explain to me why exactly the remainder deserve an increase in their wages.

Of those few let's take out those who have been job hoppers (their poor wages are a reflection of the employer's confidence in the employee's tenure). Let's also take out those who are at minimum wage but that job is NOT the main income source. Who remains? And of those, is it OUR job (the consumers who will pay in either diminished services for cut staff or higher prices) to raise those people's "pride"?

Pride and the circumstances that cause pride can not be manufactured. If someone's job is a "hit on someone's pride" then a raise for no reason will not change the fact that they are in a job which offers no pride.

Finally, I asked this on my radio show and got no answers. Where can I find a minimum wage job? Especially in the Minneapolis/St Paul or St Cloud areas?

9:13 AM, July 10, 2006  
Blogger Dingo said...

your idea is not a bad one and has some merit. But as many of the commentors noted above, it does have some draw backs.

And additnoal problem is that the EITC is paid all at one time. this does not help the working poor who need the income each and every pay check and would probably have problems managing a lump sum of money when creditors and bills are at the door. And, unfortunately, when the government sends a check out each and every month, it is seen as welfare and not a tax credit.

But, it is a constructive idea and we need more of that in this debate.

1:16 PM, July 10, 2006  
Blogger HM2 Viking said...

Another way to view the EITC is as a refund for payroll tax contributions. I personally support raising both the minimum wage AND the EITC. I also think that the tax forms need to be simplified for claiming the EITC.

Thankds for visiting my site adn leaving a comment.

2:53 PM, July 18, 2006  
Anonymous christian calderon said...

THE EITC COMPLIMENTS THE MINIMUM WAGE--IT CAN NOT BE SEEN AS A SUBSTITUTE.

This is because Minimum Wage and EITC have inverse benefits.

While Minimum Wage is weak in income adequacy, target efficiency and labor supply employment effects; ETIC is strong.

This is also a question of wether or not we as a society want to socialize or privatize wages.

EITC also has a lot of loopholes and problems--it is by far the a substitute for minimum wage.


FINALLY:
A PROPER REAL LIVING WAGE (TIED TO INFLATION/COST INDICES) WOULD ERADICATE THE NEED FOR EITC.

7:13 PM, April 22, 2009  
Anonymous Anonymous said...

We have to remember that the minimum wage creates a basic problem that we all learned about in Econ 101: the shortage of labor available when a price floor above equilibrium makes the demand for work at a wage greater than the supply.

EITC's may not be perfect, but they at least avoid this problem and provide incentives for work. Perhaps reform of the EITC system, such as monthly payments instead of yearly lump sums and greater accessibility to eligibility forms, would make EITC a more viable and effective option.

Thoughts?

10:15 AM, February 05, 2010  

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