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Home Publications Blogs CEPR Blog Tax Credit Expansions Don't Make Up for the Lower Minimum Wage Increase Proposed by President Obama

Tax Credit Expansions Don't Make Up for the Lower Minimum Wage Increase Proposed by President Obama

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Written by Shawn Fremstad   
Friday, 15 February 2013 10:15

The $9 minimum wage proposed in the SOTU is less than the $9.50 that Obama proposed during his first campaign. For a full-time worker, that's about $1,000 less per year. And, as Tim Noah has noted, if adjusted for inflation, that proposed minimum would be around $10 (or $2,000 less) today.

In response to questions about the difference, the White House makes this argument:  "Obama was able to secure refundable tax credits that are worth 75 cents an hour for someone with two children who works full-time, [NEC Deputy Director Jason] Furman said, 'so if you think of that extra money together with the extra money from this minimum wage increase, the two of those together would first of all exceed the minimum wage number he called for on the campaign.'"

Hmm, no.

The problem here is that in his 2008 campaign, President Obama proposed not only a $9.50 minimum, but also a more extensive set of refundable tax credits than the ones now in place. The tax credits the President proposed in 2008 that have not been adopted include:

  1. a refundable Making Work Pay Tax Credit, which as originally proposed would have equaled 6.2 percent of earnings up to $500 per worker (a $400 per worker MWP was in place for 2009-2010);
  2. making the Child and Dependent Care Tax Credit refundable and equal to 50 percent of child care expenses less than $6,000;
  3. a refundable "Universal Mortgage Credit" equal to 10 percent of mortgage interest for nonitemizers up to $800;
  4. more than doubling the currently very small EITC for childless workers (under the maximum credit for childless workers would have increased from $452 in 2009 to $1,110 in 2012);
  5. making the Saver's Credit refundable and changing it to a 50 percent match of the first $1,000 in savings; and
  6. a refundable American Opportunity Tax Credit equal to 100% of the first $4,000 of college expenses (as extended in the fiscal cliff deal, this credit is capped at $2,500).

One tax credit change that was included in the Recovery Act and the fiscal cliff deal, but not (I believe) in the original Obama tax plan is making the Child Tax Credit refundable for families with earnings above $3,000 (in 2008, a family could only claim a refundable CTC for if they had earnings above $12,050).

The bottom line: For most low-wage workers, the package originally proposed by the President in 2008 of a higher minimum wage ($1,000 to $2,000 more) plus a more extensive set of refundable tax credits will easily exceed the $9 minimum and the current set of tax credits. This is especially the case for families with child care expenses and for workers without children.

Consider the example of a single parent with two children who is working full time at $9 an hour. Before taking child care expenses into account, this family’s net income (gross earnings minus payroll taxes plus tax credits) will be $24,500.

With a $9.50 minimum wage, their net income would be about $1,000 more ($25,422), and at $10.15 (the 2008 pledge adjusted for inflation since then), the family would be at $26,641. And, if we add just two elements of the original Obama tax plan that were left by the wayside, the Making Work Pay tax credit and the Child and Dependent Care Tax, their income with a $9.50 minimum would be $1,500 (assuming they had no child care expenses, which is very unlikely) to $4,500 more than what it will be with a $9 minimum and current tax credits.

Furman’s argument seems to be that the provision in the fiscal cliff deal that lowers the refundability threshold for the Child Tax Credit makes up all the difference. It probably makes up about $1,000 of the difference for this single-parent family, but that still falls short of the original plan, especially once you take account of child care expenses.

And, once you take account of child care needs, it really falls short of the original plan, as well as minimal standards like the poverty line  In 2010, among families with employed mothers who made child care payments, those payments averaged about $7,200. For our single-parent family, the original plan would have offset $3,000 of that amount.

Similarly, a childless worker does much worse under a $9 minimum plus current tax credits than under a $9.50 or $10.15 minimum. The tax credit provisions Furman trumpets do nothing for her, and the Administration seems to have abandoned the provisions form its original plan (particularly the Making Work Pay credit and increase in the childless worker EITC) that would have boosted her income by roughly another $1,000.

Finally, I’m a fan of refundable tax credits, but there’s a basic question here of whether we’re getting the balance between wages and credits right. For our single-parent family, nearly one-third of their annual net income will come from tax credits, and all in a single refund check. Claiming that refund check, typically costs the parent time and money, and not getting more of that money in their regular paycheck often means they’re incurring additional credit costs during the year. Moving forward, we need both a minimum along the lines of the $10.10 Senator Harkin and Rep. Miller are calling for, as well as the missing pieces of original Obama tax plan.

Tags: inequality | low-wage work | minimum wage | pverty | tax credits | taxes

Comments (8)Add Comment
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written by watermelonpunch, February 15, 2013 10:57
Similarly, a childless worker does much worse under a $9 minimum plus current tax credits than under a $9.50 or $10 minimum. The tax credit provisions Furman trumpets do nothing for her


At least this is being addressed somewhere! Good!

Most of the public seems to ignore completely the plight of the single adult with no children living in poverty.

I've heard so much about "marriage penalties" in the tax code. But hardly anyone talks about the penalties of being a single, childless, adult, low wage worker, in our tax system.
Can't we just pay people
written by Jennifer, February 15, 2013 7:56
When you put all the tax credits together like that, it does look ridiculous. I have always been told it is better, maybe counterintuitively, that you want to keep deductions on the low side because you can do better with that money then the government holding it. This would be especially true for low-income people. Not to mention that the tax services are trying to rip them off by giving them money upfront--instant refund--but charging them high interest. If attempting some income redistribution is only possible through tax credits/federal government is there any better way to do it?
On a separate note if the minimum wage was really tied to productivity--as mentioned in a previous post which I think would put it at sixteen something--what would that look like. That is how might that be implemented--is there a particular measurement taken by the federal government that would be used.
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written by watermelonpunch, February 16, 2013 2:19
I have always been told it is better, maybe counterintuitively, that you want to keep deductions on the low side because you can do better with that money then the government holding it. This would be especially true for low-income people.


This is what I understand it as...

It's always better to not pay taxes until you absolutely have to (have to, because you'd be paying more in penalty to the government for being late than you'd be making in interest from having that money in savings/investment).

Because, it's always better to have that money somewhere it's going to be making you money. The government doesn't pay you interest on the money they held that they're refunding, neither the money they withheld because of overpayment, nor money they withheld but then refunded because of a tax credit.

One of the unfair things about taxes is that regular working people never get that chance to hang onto that money, it's taken right out all along.

I've heard it said that the idea is that "poor people are poor savers". Well duh, yeah, because they're often doing without things they NEED. Like waiting on replacing bad tires on their cars or going to the doctor until they get their tax refund!
So that withholding taxes is necessary - or they'd spend that money & not be able to pay their taxes at all when they're due... and the government acts as a nice savings account for them - which pays them NO INTEREST.

Doesn't sound very fair?
Because it's not.

I'm thinking that the very idea that tax credits can "make up for low pay" in ANY FAIR WAY, is positively ABSURD.
Because tax credits are just not applied fairly.

And it's mainly because laws are so KLUGED with various specific things for special interests stuffed into them.

Which is why when Obama's campaign, about a year ago, had this sliding scale poll quiz... where they had you rate by percentage (or something like that) what you thought was the most important to least important issues. And you could weight them.
And I put everything else at zero - and 100% importance toward campaign finance as the only important issue.

I honestly believe if we went to 100% publicly financed political campaigns... all the problems of health care costs, drug patents, minimum wages, taxes, inequality, too big to fail, fraud, economic instability... all of that, would be addressed more sensibly, and we wouldn't have so many of these majorly kluged laws.

(Of course there are others who think the answer is just to do away with any federal government. But I don't think allowing poor people to languish in the streets getting slave wages and then be pushed to a violent uprising, is the answer.)

On a separate note if the minimum wage was really tied to productivity--as mentioned in a previous post which I think would put it at sixteen something--what would that look like. That is how might that be implemented--is there a particular measurement taken by the federal government that would be used.


I'd like to know that too.

The minimum wage was never deliberately linked to productivity, right? It just so happened that it was?
Desk of Charles Lee - CEO The Boyd Capital Group
written by Charles Lee, February 16, 2013 7:48
Its would be nice to pay under-educated workers a living wage. We need a better educated work force.

http://www.theboydcapitalgroups.info/
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written by BobS, February 16, 2013 11:23
The day after the SOTU speech I was listening to callers on a morning radio show speak to the proposal to raise the minimum wage. Several of them were very small business owners (< 5 or 6 employees) complaining about it's impact. Assuming that their concerns were legitimate, I thought of one possible win/win/lose solution that would put a few more dollars in the pockets of low wage earners. It would marginalize the Social Security tax so that for any income earned below the individual median, the employee rate would be halved, with the employer still contributing 6.2%. Once the individual earned their next dollar above the median, the tax would return to 6.2%. The lose part of my proposal would be for those individuals (and their employers) whose earnings are currently capped- the cap would be eliminated, except for the employer contribution, which would be halved once their employee earned more than what was formerly the individual cap.
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written by Jennifer, February 16, 2013 12:26
@watermelon punch, it's my understanding that up until the 70s the minimum wage did go up with productivity not by design necessarily but from regular labor pressure. If that's wrong please someone correct me.
@BobS yes I was thinking about something like that, exempting lower level wages from the payroll tax and then lifting the cap. Honestly I only just starting paying attention to these number recently so I'm not really sure how the numbers would work out exactly but there has to be a better way than this.
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written by watermelonpunch, February 16, 2013 12:54
One thing that seems to be completely ignored when people talk about educating workers as a way to improve their income... is that the way civilization works, we constantly need at least a certain number of people working jobs that have absolutely no formal education requirement.

Shall we have all school students, from preschool to graduate students, take turns cleaning the toilets at their schools?
Should students in schools, and patients in hospitals, go back to having to have their families bring them cooked food, and shut down the cafeterias?

When your grandma has a stay in the hospital after a broken hip, do you want to have to take dirty hospital linens home & wash them? Or do you appreciate that there are people working in an industrial laundry outfit laundering (and sterilizing) the hospital bed clothes?

I really like the fact that I can live in a city, flush my toilet, and not have to live with people dumping sewage into ditches in my neighborhood.
I also like that people come twice a week to take away rubbish & recyclables, so they don't have to pile up around the neighborhood stinking.

Simply paying people so little, and then offering them tax credits seems to be laughable.
Offering them discounts on schooling is nice... But it doesn't help the next person in their low-wage job - as there will always be a next person in the low wage job that needs doin'!
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written by Donna G, February 18, 2013 4:55
At least this is being addressed somewhere! Good!

Most of the public seems to ignore completely the plight of the single adult with no children living in poverty.


In our family-centric culture if you are not raising children you are assumed to have buckets of disposable income and no need for any help, no matter how little you actually make. And you also have no health problems, hence no Medicaid for you in most places. Really, you're only useful when you're making a decent income they can tax heavily to subsidize parents. When you are no longer doing that, you can kindly go die quietly in a corner.

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