There's no pot of gold for the working poor

  • Article by: D.J. TICE
  • Updated: February 9, 2014 - 7:59 AM

The solutions have trade-offs — but tax credits probably beat the minimum wage.

It’s good to see the philosophical debate over inequality spawning practical ideas to help low-wage workers. The working poor need help and deserve it. It’s just not as simple as it seems.

Here’s one straightforward suggestion, though: Let’s stop raising their taxes.

In a December report, the Congressional Budget Office estimated that the poorest fifth of households saw their average federal tax rate double between 2010 and 2013, as a result of Washington’s serial budget showdowns.

Net federal taxes on the hard-up remain low. But CBO says the changes reduced the average after-tax income of the bottom fifth by 1.6 percent. That was four times the hit people in the top 10 percent took (except for the top 1 percent, who got shaved by about 6 percent).

Whatever one thinks of taxing the rich, hiking taxes on the poor these days can’t make a lot of sense. Yet Minnesota got in on the act last year, too, through its hefty hike on cigarette levies, which hit lower-income people hard.

Most of the current discussion concerns two ideas to boost the incomes of low-wage workers — increasing the minimum wage and further expanding the Earned Income Tax Credit. President Obama proposed both in his State of the Union address last month, and both have considerable support.

But both also involve trade-offs and potential unintended effects.

The primary worry about minimum-wage hikes is that employers might hire fewer low-skill workers if they cost more to employ — that jobs might be lost, or never created.

That people buy less of a thing when its price rises is something like a law of gravity in economics. Yet economists studying this question have debated for some time whether real-world data confirm that employment actually falls after minimum-wage hikes. A rough consensus seems to be that, at the minimum-wage levels in force across America today, effects on jobs are small and often hard to detect.

You might say this proves that employers are getting away with paying minimum-wage workers less than they’re really worth to the business. Or you might say it proves that getting a job (often a first job) has a benefit those workers value above and beyond the wage they earn. And you might be right both ways.

Anyway, Tim Taylor advises caution, at least about the size of any increase. Taylor is an economist at Macalester College who blogs engagingly at The Conversable Economist. He says he finds it “hard to be concerned” about small boosts in the minimum, but that with too large a hike “the effects could be quite a bit different.”

The effect of a hike can vary among regions and industries, Taylor adds, and the pain for workers who don’t find a job because of a minimum-wage hike may be greater than the benefit of the raises others receive. “Getting people attached to the workforce is key,” Taylor says.

Long-term effects should be considered, too. “In the short run it may be too disruptive,” Taylor says, to reduce one’s low-wage workforce in response to a rise in the minimum wage. But the next time an opportunity arises to replace workers with machines, how much those workers cost will matter.

Taylor also agrees that competition for some entry-level jobs might increase with a hike in the minimum. Those who most need to break into the workforce could lose their places to more-experienced folks coming out of retirement or accepting a job they would have rejected before the minimum increased.

And here again, taxes can have a surprising impact. Because many low-wage workers receive benefits through various safety-net programs that phase out as income rises, those workers can face peculiarly high “tax” rates as their earned income increases.

The CBO has studied this phenomenon, and so has the research staff at the Minnesota House of Representatives.

In a March 2013 report, House Research showed what can happen in extreme circumstances. In 2012, a full-time working single parent with two children, receiving the full array of federal and state income support benefits, would have earned an additional $5,720 if his or her hourly wage had risen from $7.25 to $10. But only $1,248 in extra income would actually have reached the worker — the rest disappearing though reduced benefits or increased taxes. That’s a vertigo-inducing “tax rate” of 78 percent.

All these complications are why expanding the Earned Income Tax Credit, at both the federal and state levels, is a better idea. The EITC, often enlarged since its inception in the 1970s, turns into a “reverse income tax” for most recipients, meaning they get a check from the government.

House Research reports that the average benefit in Minnesota in 2010, from the federal EITC and Minnesota’s Working Family Credit combined, was just under $2,500.

That benefit is tax-free. But the biggest advantage is that the EITC doesn’t run any risk of discouraging or distorting low-wage hiring, because it doesn’t change the cost of hiring a low-skill worker.

The problems with the EITC are that it costs taxpayers a good deal of money (about $60 billion a year for the federal program, and about $200 million for the state add-on) and that it seems to let employers of low-wage workers off the hook.

Frustration with the idea that safety-net programs and a low minimum wage combine to unjustly subsidize low-wage employers is behind a referendum effort in California to enact a $12-an-hour minimum wage, pushed by maverick conservative millionaire Ron Unz. A few other prominent conservatives are now voicing this kind of resentment toward those who fail to pay living wages, which has long added to progressives’ passion for ­minimum-wage hikes.

But we need to get clear in our minds whether we’re seeking to help low-wage workers or to stop helping those who employ them. We may not be able to do both. And there may be worse things to subsidize than the hiring of people who very much need to be hired.

 

D.J. Tice is at Doug.Tice@startribune.com.

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