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Can Tax Credits Replace Minimum Wage Increases? |
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Since 1997, when Congress last raised the minimum wage, the real value of the minimum wage has fallen about 20 percent because of inflation, while the earned income tax credit (EITC) and child credit have been expanded. This brief illustrates how current tax rules interact with the minimum wage and considers whether increased tax credits could substitute for minimum-wage increases for those earning the federal minimum wage. Increasing tax credits enough to substitute for raising minimum wage is probably infeasible because of the cost and the high marginal tax rates required. The minimum wage serves as a floor on earnings for most low-wage workers, regardless of their family characteristics. Full-time minimum-wage workers received no benefit from the EITC expansions and only benefited from the child credit expansions from 2001 through 2004. If wages were held constant at $5.15 an hour for a full-time worker,1 the maximum EITC would have to increase by about $5,000 for a one-earner household to achieve the same after-tax income as an increase in the minimum wage to $7.25; the EITC would have to increase about $6,500 for a twoearner household to achieve the same gains.
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