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OECD Calls for Strengthening EITC and Minimum Wage

The Earned Income Tax Credit (EITC) “has been effective in fighting poverty and encouraging work,” the Organisation for Economic Co-operation and Development’s (OECD) new Economic Survey of the United States finds.  The report recommends expanding the EITC to reach those largely left out — and lifting the federal minimum wage to make such an expansion more effective.  These are timely messages, given that proposals before Congress would accomplish both goals.

The EITC “encourages low-income parents to take up work by lowering their tax rate and by providing a financial bonus for their work,” the OECD explains, noting that the research shows any negative effect on employment from the credit’s gradual phaseout at higher income levels is limited.  As we’ve pointed out, studies show the EITC is particularly successful at raising employment among single mothers.

To make the EITC even more effective, the OECD suggests strengthening the credit for childless workers (including non-custodial parents) by expanding their credit and lowering the age eligibility threshold from 25 to 21.  Since childless workers now receive little or no EITC, it’s “less effective at increasing employment and reducing poverty” among this group, according to the OECD.

In part because the EITC for childless workers is so meager, childless workers are the sole group that the federal tax system taxes into poverty.

The President’s 2015 budget and a number of congressional proposals would address this glaring hole in the EITC by strengthening the credit for childless workers.  The President’s proposal, for example, would lift about half a million people out of poverty and reduce the depth of poverty for another 10.1 million, the Treasury Department estimates.

The OECD report also recommends that expanding the EITC “would be more effective supported by a higher minimum wage.”  We strongly agree.

As we’ve explained, the EITC and federal minimum wage are complementary ways to support low-wage workers, not alternatives.  One reason is that the EITC, by increasing the number of people seeking jobs in the low-wage sector, can put downward pressure on the wages that employers offer potential workers.  A higher minimum wage helps offset that effect.

The OECD points out that the effects of minimum-wage increases on employment are “uncertain” and recommends carefully monitoring the impact of any such increase.  But it also notes, “[t]he value of the minimum wage has declined significantly in real terms over time” and “[r]elative to the median wage, the current federal minimum wage is well below the average statutory minimum wage in OECD countries.”

“Plentiful empirical evidence suggests a modest increase in the minimum wage from such a low level will have no or only a small negative effect on employment of low-skilled workers,” the OECD concludes.  A proposal before Congress would raise the minimum wage from $7.25 to $10.10 in three annual increments and then index it to inflation.