BRUNSWICK — Like many of our fellow Democrats, we are concerned about the extent of the inequality of incomes and the stagnant real wages in the U.S., especially for the lowest-wage workers.
In recent weeks, there has been much discussion of raising the minimum wage as a way of dealing with these problems.
We are pleased that these problems have gotten the attention of people and that they are expressing a willingness to do something about them. But we are concerned with the focus of political leaders from President Obama on down on doing this by raising the minimum wage.
There is a better way to deal with these problems: It is to expand the earned income tax credit.
The earned income tax credit was originally enacted in 1975 and has expanded since then. A refundable tax credit for low-income working individuals and households, it acts as a 40 percent wage subsidy over a range of earnings, and then is gradually phased out.
The lower the income and the more dependents an individual has, the larger the tax credit. The credit serves to reduce the amount of income tax being withheld, thus raising take-home pay. And if the tax credit exceeds the amount of income tax withheld, the individual gets a cash refund.
Working families with two children are eligible for the earned income tax credit if their annual income in 2013 is below $43,000 (or up to $48,400 for a married couple).
Income eligibility thresholds vary by number of dependent children and marital status and range from $37,900 to $51,600. (Workers without children qualify for a much smaller benefit.)
For each dollar earned in 2013, up to $13,430, families with two children receive a tax credit equal to 40 percent of those earnings, up to a maximum credit of $5,372.
Expanding the earned income tax credit has several advantages over raising the minimum wage.
n Both work to reduce poverty, and to some extent, they work together. The earned income tax credit is better targeted to low-wage workers, however, because of the income eligibility limits; not all minimum-wage workers are parts of low-income households.
Since earned income tax credit benefits are larger for families with children, it has also been shown to reduce child poverty.
n Research has shown that the earned income tax credit increases employment of low-wage workers because it acts as a wage subsidy and does not raise wage costs for employers. The minimum wage raises wages at the bottom as well, but it also raises costs to employers, who consequently may reduce hiring.
Research is mixed on the size of the minimum-wage employment effect, but the earned income tax credit more clearly raises employment.
n Finally, the earned income tax credit income subsidies are paid for by higher taxes on middle- and upper-income Americans.
The minimum wage also serves to subsidize low-wage workers, but the subsidy is implicitly paid by taxing the companies that hire these workers and the consumers who buy products made with minimum-wage labor.
President Obama has included an expansion of the earned income tax credit in his budget proposal for FY 2015. Although this budget is widely viewed as “dead on arrival,” especially in the House of Representatives, perhaps an expanded earned income tax credit will be seen as a more attractive option than raising the minimum wage.
Maine has its own state-level earned income tax credit. However, unlike the federal earned income tax credit, it is not fully refundable. This means that if the state credit exceeds the person’s state income tax liability, he or she does not get a refund.
In 2013, the Maine Legislature voted to expand the state earned income tax credit, but the measure, L.D. 455, was tabled because of fiscal concerns.
As far as we can tell, neither Gov. LePage nor independent gubernatorial candidate Eliot Cutler has taken a position on expanding Maine’s earned income tax credit, but the strong Republican opposition in the Legislature to L.D. 455 leads us to expect that Gov. LePage would also oppose expansion.
In addition to advocating an increase in the state’s minimum wage, Democratic gubernatorial candidate Mike Michaud has called for making the state earned income tax credit refundable.
He says that by doing this, “ … we fight poverty while adding fairness into the tax code.
“The credit helps to ‘make work pay’ and moderates the gap between rich and poor.” We agree.
— Special to the Telegram