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Two Good Ideas for Fighting Poverty

Expanding the Earned Income Tax Credit and raising the minimum wage are both critical.

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Taxes should not drive people into poverty — or deeper into poverty — and they don't for most Americans. But that's not true for one group: low-income workers without minor children. Congress should plug that hole in the safety net by enacting two proposals from President Obama's State of the Union address: raising the minimum wage and expanding the earned income tax credit, or EITC, for childless workers.

The EITC, which Congress created in 1975, has been a great success story for low-income working families. Next to Social Security, the EITC combined with the refundable portion of the Child Tax Credit is our most powerful anti-poverty program, lifting 10.1 million people out of poverty in 2012, including 5.3 million children, according to analysis by my colleagues at the Center on Budget and Policy Priorities (see chart).

Graph showing data on safety net programs keeping millions out of poverty.


[See a collection of political cartoons on the economy.]

For poor families with children, the tax credits are large enough to raise their after-tax income above the poverty line. For low-income workers without minor children, in contrast, the EITC is much smaller and the income thresholds for receiving it are much lower. As a result, a childless worker with earnings that equal a poverty line income (about $11,900 in 2013) gets a paltry EITC that barely makes a dent in his or her tax burden, and a childless adult making $14,500 working full time at the minimum wage of $7.25 an hour owes income and payroll taxes but doesn't even qualify for the EITC.

Bipartisan support for expanding the EITC for childless workers is quickly growing. It appeals to those who want to give struggling people a financial leg up and to those who value the work ethic and personal responsibility because it promotes work. Here, for example, is Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers: "Increasing the credit for childless workers to an amount closer to that for families with children would augment the direct work incentive and help counter poverty among the working poor."

Not only is the current EITC for childless workers pitifully small but, as CBPP President Robert Greenstein told Congress recently, "childless workers under age 25 are flatly ineligible for the EITC, so young people just starting out receive none of the EITC's proven benefits." That's why proposals to expand the EITC for childless workers should both provide an adequate credit and lower the eligibility age to receive it.

Proposals to raise the minimum wage don't attract the same bipartisan support among economists as those to expand the EITC for childless workers. Most conservatives view the EITC as a replacement for the minimum wage, mainly because they believe that raising the minimum wage triggers undesirable employment losses. As I've argued here previously, however, the weight of the evidence suggests that for minimum wage hikes in the range that proponents are now pushing, the costs of any employment losses are small compared with the benefits to low-skilled workers who receive larger paychecks.

[See a collection of political cartoons on the budget and deficit.]

Thus, the EITC and the minimum wage should be complementary policies. As my CBPP colleagues Jared Bernstein and Sharon Parrott argue, "In reality, it takes both a strong EITC and an adequate minimum wage to ensure that work 'pays' for those in low-wage jobs."

The EITC brings people into the labor force, but that increase in labor supply can exert downward pressure on wages.  Offsetting that effect with an even larger EITC might require higher budgetary costs than policymakers would willingly pay. That's where a higher minimum wage can come in. In addition, an EITC recipient typically receives the benefit once a year at tax time, whereas a higher minimum wage shows up in every paycheck.

The best policy for helping low-wage workers (beyond moving the economy back to full employment) is expanding the EITC and raising the minimum wage. But while they work out their differences over the minimum wage, maybe lawmakers could agree quickly to expand the EITC.

Chad Stone is chief economist at the Center on Budget and Policy Priorities.