The Earned Income Tax Credit and the Minimum Wage

February 17, 2014

The earned income tax credit (EITC) targets poverty better than a minimum wage, says Ben Gitis, a policy analyst at the American Action Forum.

The EITC was passed in 1975. A low-income, working family receives a credit based on a fixed percentage of earnings. As earnings increase, the credit also increases, reaching a maximum value that depends upon the number of children in the family. If a family's tax liability is smaller than their EITC, the family still receives the full value of the EITC.

The EITC developed in response to proposals in the 1960s and 1970s that aimed to help the poor but did not include strong work requirements. The EITC is only available for working families and targets poverty much more effectively than does the minimum wage.

  • The average family earnings for an EITC worker are $24,017, compared to a minimum wage worker's average family earnings of $48,860.
  • The average number of hours worked by a person receiving EITC is 35 hours, compared to 24.2 for a minimum wage employee.
  • More than 58 percent of EITC workers are in poverty. Only 5.3 percent of those receiving the minimum wage are actually in poverty.
  • And the EITC has a much greater reach. In 2012, 11.6 percent of all workers received the EITC, whereas only 1.6 percent of employees earned at or below the minimum wage.

A minimum wage increase would do little to help poverty.

  • In 2012, only 1 percent of people in families with incomes below the federal poverty line earned at or below $9 per hour, and only 1.3 percent earned at or below $10.10 per hour.
  • Moreover, only 1.8 percent earned at or below $15 per hour.
  • Had the minimum wage been raised in 2012, even up to $15, it would not have helped more than 98 percent of people actually in poverty.

The EITC also promotes employment more effectively than the minimum wage.

  • In 2012, the average family income of the employed was $90,223.37, well above the national average of $76,965.60.
  • EITC recipients average 35 hours per work, compared to slightly more than 24 hours per work for minimum wage workers. Greater work hours not only increase pay, but provide skills and experience that can lead workers to higher paying jobs.

The minimum wage has developed into a tool to combat poverty, though it is ineffective at doing so. The EITC, on the other hand, helps more people and actually targets poverty far more effectively.

Source: Ben Gitis, "Primer: Earned Income Tax Credit and the Minimum Wage," American Action Forum, February 5, 2014.

 

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