NCPA - National Center for Policy Analysis


June 2, 2004

The near-universal conclusion of decades of economic research is that increasing the minimum wage reduces total employment. The Employment Policies Institute (EPI) says a better way to improve the welfare of the poor is a wage-based tax credit (WBTC), an improved version of the Earned Income Tax Credit (EITC).

In order to encourage work, the EITC reduces the amount of taxes owed by low-income workers and even provides a refund in many instances. However, under the EITC, full-time wage earners receive the same benefit as those earning a much higher hourly wage but working fewer hours. For instance, a parent earning $7 an hour working full-time can receive the same EITC benefit as an employee earning $21 an hour but only working a few hours per week.

Instead of rewarding those with high-hourly wage rates who choose not to work, the WBTC reduces the benefits given to such individuals and transfers them to low-wage workers:

  • Under such a system, low-wage families would earn at least $6.50 an hour and provide the average low-wage individual with an additional supplement of over $2,000.
  • Full-time minimum wage family heads would increase their effective wage to up to $8.50 an hour.
  • The majority of benefits would go to families supported primarily by a wage of $7 an hour or less.

These results could be achieved for over $2 billion less than the current $35 billion annual budget of the EITC. However, if the same amount of money was put into a WBTC, the benefits to low-wage employees would increase by 37 percent.

The EPI says these alternations would increase the quality of life for low-wage Americans without decreasing their employment opportunities -- an inevitable consequence of minimum wage laws. In fact, average family heads would receive a total effective wage increase greater than most proposed minimum wage hikes.

Source: "Helping Low-Wage Americans - Wage-Based Tax Credits: A New Solution to an Age-Old Problem," Employment Policies Institute, May 2004.

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