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By Global Public Square staff
The economic buzzword of the year is inequality – it has sparked protests around the world, it’s a centerpiece of President Obama's agenda now, and it has even inspired an unlikely bestseller.
People watch the growing inequality around the world and in the United States and despair about what to do. One of the most popular fixes is raising the minimum wage – and that’s not just on the left. Germany's Chancellor Angela Merkel has recently supported a new wage increase, as has Britain's Chancellor of the Exchequer the Conservative Party’s George Osborne.
In the United States, President Obama proposed boosting the federal minimum wage to $10.10 an hour at the beginning of the year. That's a 39 percent increase over the current wage minimum of $7.25. Republicans have, of course, made it clear that they will never pass this in Congress.
Last week, the International Monetary Fund weighed in and urged the U.S. to raise the wage floor, saying it is low by both historical and international standards. The federal minimum wage in America was about 38 percent of the median wage in 2011, which is one of lowest percentages among the rich countries of the world.
A group of more than 600 economists signed a letter imploring the president and Congress to pass a wage hike, which they contend would have “a small stimulative effect on the economy."
Truth be told, small is the operative word. But it's really not clear what kind of effect raising the wage would have on the U.S. economy. The billionaire investor Warren Buffet has made very clear his positions on most economic issues but not this one – Buffett said on CNN in April: "I thought about it for 50 years and I just don't know the answer on it."
There is, in fact, a better way to help the working poor. What's more, it’s something that has some bipartisan support, and is something that the vast majority of economists agree will make people better off.
What could it be? Well, we need to raise substantially the earned income tax credit.And while that might sound really boring, let us explain why people should be excited.
The Earned Income tax credit – the EITC – is a tax refund for people who earn under a certain threshold annually. So if you earn under $51,567, you automatically get an extra refund check from Uncle Sam.
The average worker got anywhere from $2,000 to $6,000 back in 2012 depending on how much they made, whether they are married, and how many kids they have. What we are suggesting (along with many others) is that more people should get more money back through the EITC.
Here's why the EITC is a more effective way of attacking poverty.
The Congressional Budget Office found that if the federal wage were increased to $10.10, as Obama has proposed, 19 percent of gains in income would go to workers below the poverty line. It’s the intention to help those people. But, get this – the CBO says that 29 percent of the income gains would go to households that make three times the poverty level.
So raising the minimum wage is a blunt tool – it helps some working poor, but also others and thus is inefficient. Meanwhile, the Earned Income Tax Credit ensures that money almost entirely gets to the poorest workers, to those who need it the most. It’s by far the most effective way to fight poverty and reward hard work.
Here's the problem. It's less palatable to politicians because they can't pass off the costs to employers. They have to pay for it themselves, directly through the federal government. But that shouldn't matter because it's a much more effective, efficient mechanism.
In March, the White House did propose an expansion of the EITC, to cover substantially more Americans. Some Republicans have gotten on board. It would be funded by closing corporate tax loopholes – which would be a good thing to do anyway.
The EITC is an anti-poverty tool that works. If it didn't exist, 3.1 million more children would have lived in poverty in 2011. It is a fundamentally conservative idea, supported by Milton Friedman that eats away at inequality by investing more in working Americans.
Can Washington get over its polarization enough to say yes to a good bipartisan idea?