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November 20, 2006

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Great news for the janitors.

We could index the whole EITC system after extending or broadening it.

Seb: the EITC is indexed. The problem is that if the minimum wage isn't indexed as well, minimum wage workers will be starting with a smaller and smaller income, so they will get a smaller and smaller credit (in real terms.) The minimum wage is what sets a limit to how far down the ascending side of the slope a person who works a given number of hours can possibly start; the EITC can't do that, as long as it has anything like its current form.

And if you tell'em Milton Friedman invented it, the conservatives might even support it - wahey! bipartisanship!

Alex,

Not likely -- at Republicans' insistence, auditing of EITC recipients is at a higher rate than people earning over $100,000 per year.

Between 15% and 25% of those eligible don’t claim the EITC now. Any thoughts on what can be done about that? I know that there are local groups that do outreach initiatives for this, but should the federal government be doing more to reach people?

Any thoughts on why someone wouldn’t file for it? It seems that if you even went through the motions of determining whether you had to file at all, you would have to bump into it.

If it’s really as high as 25% - that’s millions of people who aren’t taking advantage of what is already available.

What can be done about it? Targeted public service spots? Requiring employers to insure that all of their employees are aware of it?

A question about the EITC: would it be equivalent if the EITC were given as a tax credit to all businesses that employed people for at or near the minimum wage (which would then be substantially raised to compensate)? It seems as if this might help people claim their credits without them actually having to claim their credits, if you know what I mean...

I suspect that Alex was talking about the negative income tax when he said that Friedman invented it.

Hilzoy, "The problem is that if the minimum wage isn't indexed as well, minimum wage workers will be starting with a smaller and smaller income, so they will get a smaller and smaller credit (in real terms.)".

In theory, this is a problem, currently however a minimum-wage single-mother of two gets an effective 40% increase in pay from the EITC, and is eligible for other benefits as well. People rarely stay at minimum wage for long, so it gets better from there. I would be more interested in increasing the ratio of money earned to 'rebate' as a method of helping out low income workers. (If for example you didn't change the max-point this would increase the starting level of the benefit, decreasing the slope of the benefit curve.)

"A question about the EITC: would it be equivalent if the EITC were given as a tax credit to all businesses that employed people for at or near the minimum wage (which would then be substantially raised to compensate)?"

Without careful implementation I worry that the existance of such a credit would give an incentive to depress wages in order to qualify for the credit. The phase-out works well for individuals because your earnings go up enough to make it worthwhile to try to keep earning more. From the position of making payments for labor, the incentives wouldn't work the same way.

What can be done about it? Targeted public service spots? Requiring employers to insure that all of their employees are aware of it?

Maybe someone with better knowledge of taxes will object, but it seems like enrollment ought to just automatically "happen" when you fill out your taxes. I'm unaware of why anyone would want to opt-out.

OCSteve: I don't really know the answer to your question, but I found the IRS website pretty confusing, and I have a PhD -- and the all-important internet access. If there were some way to implement Jonas Cord's suggestion, I'd be all for it.

Wes Clark, in his wonderful tax plan that (warning: pet peeve ahead) the media almost completely failed to cover, had some mechanism whereby people who live simple financial lives (no investment income, just work and maybe kids and mortgage deduction) would not have to file tax returns (though they could if they wanted; no one would be prevented from slaving over a tax return.) I can't find it on the internet anymore, but it was very good. I told the people who clean my house about it, and it convinced them to register to vote on the spot. (Conveniently, I am certified to register people, and had registration forms handy. Grin.)

So I read from the EPI faq:

New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.

So what I wonder is: lots and lots of minimum wage jobs are in industries where demand elasticity means that employers get to pass on the additional costs. If that's so, the costs get absorbed higher up the income chain rather than leading to a loss of demand. I wonder if that has implications (as many as vague factors mentioned by the quote). So then a minimum wage increase is more redistributive than it is market-distorting. Does this sound plausible to people?

Addendum to last post: I just realized (an analogy here to Giffen goods) that you have to consider demand here as demand for the industry as a whole (that is, for the type of good, very broadly construed) because minimum wage labor is part of all of my (as a consumer) alternatives to the good. A minimum wage law, by being federal, will affect any alternative I might turn to as well. So, my point: demand elasticities become less elastic the wider the class of goods we consider, which makes it all the more plausible that demand is inelastic and costs can be passed on.

Addendum to addendum (sorry, this popped into my head an hour later): If any of this is true (and this is how seriously I should be taken: I've never taken an econ class, and I'm just speculating without a statistic to save my life), it wouldn't be a particularly progressive form of redistribution. For the most part it would be like redistributing betweeen the working poor and those slightly above them in the paygrade.

Another question is whether there is a relationship between changes in minimum wage law and the price level.

Ara, you don't have to apologize for thinking aloud (so to speak). We write half-formed ideas here all the time and try to hash them out. That is why we try to keep things friendly enough to actually make it possible to hash things out.

Since we're thinking aloud anyway... Isn't one of the disadvantages of working via the EITC that it needs more government? Wouldn't the party of small government prefer higher minimum wage to make sure it ends up with working people (EITC doesn't necessary) and government involvement is as small as possible?

But the Republicans aren't "the party of small government". They never have been. What they are is "the party of government for and by a small number of people" which is a very different thing.

1. "A negative income tax, on the other hand, would remove the need for increases in the minimum wage, if it (basically) said: if you make below a certain amount, then the government will give you money, and the less you make, the more you get."

The EITC is a form of negative income tax, albeit (as you discovered) a horribly complex and convoluted form. (Indeed, you can thank us free marketeers for the idea --e.g., Milton Friedman -- just not the execution.) So far as I'm aware, no proponent of a negative income tax favors the formula you suggest; all favor a negative income tax with an incentive structure. I do, however, favor simplification.

2. The janitors collective bargaining victory had little to nothing to do with the minimum wage and nearly everything to do with, well, their collective bargaining efforts. I don't see the sense in linking the two.

3. "Yay! And for all you conservatives out there: don't worry, this is just the free (labor) market at work. Nowhere in Adam Smith is bargaining prohibited."

No problem with bargaining; it's the interventions in the workings of the labor market by regulators (i.e., the government) that are generally (although not always) the problem.

i wanna know what is the least amount of money you have to make to be eligable for the eitc? we made a very low amount this year and not sure if we qualify could someone please let us know what the limit is thanks a bunch!!!

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