April 17 2014

Policy Focus: Why Earned Income Tax Credit Beats Minimum Wage

Rachel DiCarlo Currie

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Lawmakers are considering two options for boosting the incomes of less-skilled workers: (1) raising the minimum wage and (2) expanding the Earned Income Tax Credit (EITC). They should embrace the second one. The EITC has proven its ability to alleviate poverty while encouraging work. By contrast, minimum-wage hikes can destroy jobs and shrink economic opportunity.

Created in 1975, the EITC is a “refundable” credit, which means it can be delivered to beneficiaries (low-income workers) as a direct payment if their net federal-income-tax liability is zero. Every year it lifts millions of Americans above the official poverty line by incentivizing them to work and then augmenting their wages. As a result, the EITC has become Washington’s most widely celebrated anti-poverty tool, and it has been expanded by Republican and Democratic presidents alike.

While the EITC is hardly perfect -- among other flaws, it is too complex, and imposes high marginal tax rates and marriage penalties on certain recipients -- it remains a better vehicle for fighting poverty than the minimum wage.

Most minimum-wage workers come from non-poor households, and raising the federal minimum from $7.25 to $10.10 an hour, as Democrats have proposed, “would reduce total employment by about 500,000 workers,” according to the Congressional Budget Office. 

Rather than jeopardize hundreds of thousands of jobs, Congress should reform and expand the EITC instead. 

Click here to read the complete 6-page policy focus in PDF. 

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