Today is Earned Income Tax Credit (EITC) Awareness Day, an effort to make low-income taxpayers aware of the tax credit that provides an important boost to low- and moderate-income families. It also provides the opportunity to address a common misconception around the EITC.
Policy discussions sometimes describe EITC expansions and minimum wage increases as alternative, competing policies for helping low-income workers. But, as economist Jesse Rothstein and I explain in a new report, this framing is incorrect. The two policies are actually complementary. A minimum wage increase and EITC expansion are more effective together than either is on its own.
Federal, state, and local increases in minimum wages have raised the incomes of low-wage workers and their families. The best published scholarship estimates that a $12 an hour minimum wage in 2017—very similar in real terms to current proposals for a gradual increase to a $15 an hour federal minimum wage—would have lowered the number of individuals living in poverty by six million, with disproportionately large effects for people of color.
In contrast, the EITC is a refundable tax credit available to low-income families who have positive earned income: Eligible households receive a net tax refund that supplements their earnings. In 2018, over 22 million working families and individuals received an average credit of nearly $3,200. Like the minimum wage, a large body of research indicates that the EITC reduces poverty, and the tax credit also improves health and educational outcomes. In addition, the EITC can also raise total incomes above the low floor guaranteed by the minimum wage in many parts of the country. The current EITC refund adds 39%—or about $5,800—to the pretax earnings of a single parent with two children working full-time at the federal minimum wage.
Because the EITC begins at $0 for families who do not work and then gradually increases in value as pretax earnings grow, it encourages people to work. But this increase in labor market participation has a downside: With more potential workers, low-wage employers can reduce wages, diluting the value of the credit. Reduced wages are particularly problematic for single adults with no children who are rarely eligible for the EITC. As a result, while low-income families overall benefit from the credit, ineligible low-wage workers may see their earnings from work fall. This means the tax credit is not as effective as it could be: The best estimates suggest that out of every dollar spent on the EITC, employers capture at least 27 cents due to reduced wages.
Importantly, a minimum wage can counteract this dilution. By placing a floor under wages, a minimum wage prevents employers from lowering wages in response to a more generous EITC. This is why it is good policy that all six states that expanded their state-level EITCs in 2019 also already have or will have state minimum wages that are significantly above the federal floor. When EITC expansions are coupled with minimum wages, both policies work together to improve low-wage workers’ economic situations.