A smarter way to tackle poverty
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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?
@fareedzakaria on Twitter
The GOP Prayer/Mantra/Solution: Dear God...With your loving kindness, help us to turn all the Old, Sick, Poor, Non-white, Non-christian, Female, and Gay people into slaves. Then, with your guidance and compassion, we will whip them until they are Young, Healthy, Rich, White, Christian, Male, and Straight. Or until they are dead. God...Grant us the knowledge to then turn them into Soylent Green to feed the military during the next "unfunded/off-the-books" war. God...Give us the strength during our speeches to repeatedly yell........TAX CUTS FOR THE RICH!!!..........and........GET RID OF SS AND MEDICARE!!!
In your name we prey (purposely misspelled, or is it?)........Amen
@ The GOP Solution:
Absolutely.
When poverty is the question, prayer is the answer.
The new edition of "Sarah Palin's Book of Baby Name Suggestions" is due out soon. Here's a sampling of some of her favorite baby names. ' Fargo, Mudflap, Bristoltwit, Pinworm, Trigtwit, Nozzle, Mucus, Checkvalve.' Soon to be parents take note !!
And top of the list for girls is FEMALE (Pronounced FEM-ALL-LEE for Teatwits) because they thought when the hospital but the word "female" on the bassinette, the hospital gave the kid a name.
After seeing results of a recent poll in Iowa, I pondered whether our working poor (and unemployed workers) think that they would be more comfortable during a presidency of Governor Christie, or one of our former Secretary of State, Hillary Clinton.
Yes, by all means, let's increase the % of people who pay no taxes. Ideally we'd have 1% paying all the taxes for the other 99%. Then we can all just vote up tax increases because it will have no effect on most of us. We'll all get roads, schools, libraries....and pay absolutely nothing for it. It's a plan that can't fail.
EITC must be claimed as a regular credit during the year. Most EIC received as a Tax Refund is probably misused and does not go towards living expenses.
Oh for sure you can maximise tax revenue by taxing the ones who make the least! And sadly thats true! Because THEY PAY their taxes unlike the very wealthy!
@ Pravin...HOW do their living expenses get paid then? Maybe you should do more research before you make such outrageous remarks!
If the minimum wage kept up since the 1960s, it would be in the ball park of $24/hr right now... Productivity in the US has increased, yet the average American worker hasn't received a dime of that increase. Where did the money go? You guess it, the executives. So a minimum wage increase to $10/hr will lift 5 million people out of poverty and stimulate the economy to make it grow by $22 billion. That will in turn add more jobs. But it looks like this legislation will not pass, because we have a bunch of Republicans in the house paid by billionaires who say no.
Thank YOU @ Ferhat! Common sense! And it amazes me how many people DONT have it! There is no way this country should have sooooo many people at the poverty level like we do! Particularly military veterans! Shame on us!
Why not do both? Increase the minimum wage and let more people get more money back from the EITC. The combination sounds to reach the most people, by creating a better opportunity to earn more from working hourly minimum wage jobs while also broadening the assistance of EITC. The burden is divided between both the employers and the federal government.
How did you come up with that being "assistance"? Its a tax break alot less then the rich have been given! The very first word is EARNED for petes sake!
And trust me, the only reason Republican Congress passed EIC was to stop the raising of taxes on the rich...which they are a part of! Just like voting themselves a raise while having to work fewer days! Theyre shrewd...when it comes to their bank accounts!
Sorry meant EITC
... PACE – PEACE! The smartest way to tackle poverty: PACE – PEACE! If we invest PEACE into the GREAT MIDDLE EAST region we would create prosperity, new businesses, economic development, stability and millions in new jobs in America and NATO countries.
There are many problems with income structure. For instance I remember when a first time start up insurance company in California, health plan of the redwoods, CEO ran the company into the ground and got his 44 million plus. I really can't understand the math. Wall street manufactures a con to sell bad home loans, the rating agencies give it AAA rating and the insurance companies sell four times the insurance and don't keep a cent to cover their policies and AIG hands out nice bonus checks. Yet no one goes to jail. The congress passed these investment mechanisms and their still employed.Yes, there is a problem with compensation in this country.
Again, society in my country faces the ruthless force of our polarization, which is based primarily in the inability of most USA citizens (and residents) to consider the nuances of a somewhat complex situation.
Because my independent thinking places me in a centrist position in a categorization system caused by a demand for vivid red or vivid blue flags, I often offend writers with whom I agree on many points of the discussions here.
Hourly wages have been a firm ideology when it comes to labor. However, for administrators, management and investment and innovation there are differing compensation mechanisms. In the real world it seems when we try and connect value we fall short. To pay someone a wage based upon these arbritrary mechanisms points to the root of a problem. If we reason it through there is no connection, no compliment no parallyl to any real value to the work provided. Without a value added mechanism any profit mechanism is devoid of appropiate compensation. In other words no one person equals the same value and therefore should be compensated for their individual effort, honesty, integrity and creative nature to problem solve giving them greater value. Hourly pay should be a base compensation not a recognition for their value to any company. However this represents a truly innovative means to encourage participation, timely engagement and thoughtfulness to any employer equal to a deeper understanding of the value of employment and a rational means to reward. Any company willing to bring an honest discussion of value to their compensation mechanism would find willing applicants.
@ Allan Kinsman is absolutely correct: wages should be linked to the value produced by the worker.
Each person's work is not of equal value.
I posed this situation to a friend, a union organizer, years ago:
a shirt manufacturer expects a worker to sew a certain number of pockets on shirts in five minutes. Arbitrarily, say ten pockets every five minutes.
If one worker can easily sew thirty pockets every ten minutes, should her wages be tripled?
My friend said no. Instead of the worker's being paid more, the other workers should tell the fast worker to slow down.
Sorry for the time/pocket math.
My examples were ten pockets sewn on every five minutes, or thirty pockets every five minutes.
Thanks for your clarity. It seems we like making rules as an illusion to suggest we move forward but really we find comfort by shaping a world overly complicated so we don't have to change?
@ Allan Kinsman:
Thank you for your insight.
In my opinion, many rules made with the intention of helping others to prosper are devastating mistakes caused by the inability to think conceptually and in the devil's details.
I suffer from being a cynic. It seems to me in todays highly political world with it's unseen influences any action with the intension of making improvement has underlying theme's.
@ Allan Kinsman:
I don't think that being cynical and analytical should cause suffering.
The underlying themes are some of the devil's details that I mentioned.
Some who advocate some "progress" are not aware of all of their motivations for advocacy, and others are completely aware.
I agree, there are those which embrace their realities and those which attempt to manipulate a reality. In my mind progress has to do with a comprehension. In my mind this is not related to absolutes but more in a direction of wisdom. If tendencies continue in the same direction, in mind suggests tampering. In a consistent form something more than accident. This begins to express proofs. As far as suffering, I speak of long term delusion. To correct this is a welcomed life long endeavor.
Neo-Liberal thinking, Tax Policy is always the answer!
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