Of course, Congress should immediately raise the federal minimum wage to $15 an hour. But raising the minimum wage is only part of the answer. To shape a complete poverty-fighting agenda, Washington should combine a higher minimum wage with a more robust earned-income tax credit.
We did a version of this in Chicago, and the results have been better than good. In 2014, the city moved to raise the minimum wage gradually to $13 an hour by 2019, while also making the EITC much easier to claim and receive. Since 2011, the city’s poverty rolls have fallen by more than 130,000 people, with children making up half of this decline. Through the middle of the decade, Chicago outpaced both the rest of Illinois, as well as New York City and Los Angeles, in moving its residents out of poverty. This multifaceted approach is the most promising way to turn the minimum wage into a more livable wage.
The EITC may be the most powerful tool government has to fight poverty. The program enables low-income workers not only to reduce their federal taxes, it puts additional money back in their pockets. The resulting refunds can be significant: If you’re in a family earning $24,000 a year, the credit can mean $6,000 a year. That’s equivalent to a 25 percent pay raise.
It’s hard to turn your back on that sort of bonus, yet many do. Why? After being established by President Gerald Ford, praised by President Ronald Reagan as part of “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress,” and then expanded twice by President Bill Clinton and once by President Barack Obama, the historically bipartisan EITC needs an update.
Here’s the first problem: As it currently stands, 20 percent of eligible recipients do not apply for the EITC because they either are unaware that it exists, not sure how to claim it or find it too complicated. In response, we hosted tax clinics throughout the city, helping residents apply. Congress ought to simplify the application and then incentivize the private sector to help workers apply. Lawmakers could predicate any company’s ability to deduct capital expenses or any other major deductions on their success in having eligible employees earn the EITC refund. That would align the employers’ bottom line with their employees’ compensation.
Second, we ought to change how the credit is paid back to workers. At present, beneficiaries are awarded their refunds once a year — after they file their tax returns. That prompts many families to seek out usurious “payday lenders” willing to extend credit in the short term in return for a big slice of the final refund. As a result, much of the credit winds up in the hands of an industry known for taking advantage of the poor. In Chicago, we experimented with awarding EITC benefits on a quarterly basis — and it worked. As a study by the Center for Economic Progress established, spreading out payments helped workers better manage their finances and avoid more debt.
Third, following former New York mayor Michael Bloomberg’s lead, we ought to expand the benefits offered to single men. Currently, the EITC is weighted to help families with children. It’s time to lend a hand to men who have not yet formed families. As Obama often reminded us, it’s one thing to father a child and quite another to be a dad. We must give men the means to form and join families for life.
Good policy is almost always good politics. Combining the higher minimum wage with a modernized EITC is a proven winner. If Republicans would be willing to reform the EITC and add more resources, I’d be happy enough to see Democrats name the program for Gerald Ford or Ronald Reagan, a shift that would all but guarantee that the GOP never shortchanges the tax credit in the future. Whatever else they disagree about, Democrats, Republicans, organized labor and business leaders ought to be able to come together in service of making work pay.