Full Employment and The Minimum Wage

With the advent of our new Democratic ran Congress the debate regarding minimum wage is heating up again. Some of the most inspired debate about this issue is on Hot Blava. In this post, Bradley discusses a proposal an alternative to a minimum wage increase is better utilization of the advanced earned income tax credit.

As a brief history and analysis of the EIC, I quote the entry from Wikipedia:

"Enacted in 1975, the then very small EITC was expanded in 1986, 1990, 1993, and 2001 with each major tax bill, regardless of whether the tax bill in general raised taxes (1990), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States (despite the fact that income measures, including the poverty rate, generally do not account for the credit), and enjoys broad bipartisan support."

The structure and benefit that the EIC provides is as follows:

"Currently, for a family with two dependent children, the credit is equal to 40 percent of the first $10,750 earned, plateaus at a maximum credit of $4,400, begins to phase-out when earnings increase beyond approximately $15,000, and reaches zero when earnings pass approximately $35,000. For filers using the Married Filing Jointly status, the phase-out thresholds are increased by $2000. For a family with one dependent child, the structure is similar but has a phase-in rate of 34 percent and a maximum credit of $2,604. For those filing without dependents, there is a small credit of 7.65 percent of earnings with a maximum of $399, which covers the employee's portion of the social security and medicare payroll taxes. All dollar amounts are now indexed to inflation."

In the cases where a family of four is actually living on wages of $15,000, and therefore qualifying for the maximum earned income credit, utilization of the AEITC would increase monthly income from 1,250 to 1,617 dollars. For a family of the same size that is actually living on 5.15 an hour income would increase from 893 to 1,251 dollars a month -- an hourly increase to 7.21 dollars. On paper is appears to provide nearly the same benefit, except if you forget that an actual wage increase to 7.25 an hour would move a given wage earner to 19000 a year in actual wages instead of 15,000 dollars a year in actual income.

So I would actually argue that a increase in the minimum wage and better utilization of the advanced earned income tax credit, would be the ideal means of giving the poor a living wage. Although realistically it should be noted that 19,000 dollars a year as a living wage for a family with four children is far from a living wage, maybe another means of giving a living wage would be initiating an Advanced Additional Child Tax Credit -- a Bush administration tax provision that allows for unused child tax credit to be refunded to those within earned income and investment limits. The most costly part of such proposals is implementation, calculation of AEITC is fairly complicated and thus far highly underutilized, it would take a solid commitment of the IRS to help educate the public of the benefits of such tax provisions.

If you are living on incomes of 5.15 to 7.25 dollars an hour check with your employers about the Advanced Earned Income Tax Credit, it could increase your monthly income substantially.