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[IWS] CRS: FEDERAL MINIMUM WAGE, TAX-TRANSFER EARNINGS SUPPLEMENTS, AND POVERTY [28 February 2014]

IWS Documented News Service

_______________________________

Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

________________________________________________________________________

 

Congressional Research Service (CRS)

 

Federal Minimum Wage, Tax-Transfer Earnings Supplements, and Poverty

Gene Falk, Specialist in Social Policy

Thomas Gabe, Specialist in Social Policy

David H. Bradley, Specialist in Labor Economics

February 28, 2014

http://www.fas.org/sgp/crs/misc/R43409.pdf

[full-text, 42 pages]

 

Summary

Pending before Congress is legislation (S. 1737 and H.R. 1010) that would raise the federal

minimum wage from its current $7.25 per hour to, ultimately, $10.10 per hour. The minimum

wage would be adjusted for inflation thereafter. Whether the minimum wage or alternative

policies, namely government-funded earnings supplements such as the Earned Income Tax Credit

(EITC), are more effective in addressing poverty has been long debated.

 

The minimum wage affects workers regardless of their family status. A full-time, year-round

worker at the current minimum wage would gross $15,080 in the year. A worker’s poverty status,

however, depends on family circumstance, specifically family size. A single full-year, full-time

worker earning the current federal minimum wage would have gross earnings above the 2014

poverty guidelines, but the same worker in a family of two or more people would have gross

earnings that fall below these guidelines.

 

The federal tax system and government benefit programs take into account family circumstances

in determining tax liabilities and benefits. Therefore, minimum wage and earnings supplement

policies have differing impacts, depending on a worker’s family type. The main distinction is the

presence of children in the family. Low-wage workers heading families with children receive

considerable benefits from federal income tax credits and Supplemental Nutrition Assistance

Program (SNAP) food assistance. Childless singles do not benefit from refundable tax credits as

do households with children. The effect of federal tax and SNAP benefits is to partially mitigate

differences in net incomes relative to poverty among the family types.

 

An increase in the minimum wage would boost gross earnings and increase the net incomes of

families with a worker employed full-time, all year earning the minimum wage. However,

because the federal tax system is progressive and need-tested benefits pay more to families with

less income, the income boost would be less than $1.00 for each $1.00 increase in gross earnings,

as workers pay more taxes and lose some benefits. The degree to which workers would gain net

income because of a minimum wage increase also differs by family type.

 

The impact of an increase in the minimum wage on the well-being of minimum wage workers

depends in great part on whether the wage increase would cause a loss in employment. Some

economic studies have found that increases in minimum wages cause job loss; other economic

studies have found no such job loss. A previous consensus that increasing the minimum wage

reduces employment, at least among teenagers, has been challenged by numerous recent studies

suggesting little or no dis-employment effects of minimum wage increases. However, the debate

over the employment effects of the minimum wage is likely to continue.

 

There are also some considerations to expanding government-funded earnings supplements, such

as the EITC, child tax credit, and SNAP. Expanding these earnings supplements would result in

costs to the federal budget. In addition, these programs too might affect the labor market, albeit in

ways different from a minimum wage increase. Research has provided evidence that the EITC

has increased the number of workers in the labor market. Through the operation of supply and

demand, this could suppress wage rates. Since all workers do not qualify for earnings

supplements through the EITC, the child tax credit, or SNAP, lower-wage workers who do not

receive them might be harmed economically. There has been some recent attention to considering

minimum wage policies and earnings supplements as complementary, rather than alternative,

policies.

 

Contents

Introduction ...................................................................................................................................... 1

Plan of this Report ..................................................................................................................... 1

Taxes and Benefits Not Addressed in this Report ..................................................................... 2

Minimum Wage Policy under the Fair Labor Standards Act ........................................................... 2

Gross Earnings at the Minimum Wage Relative to Poverty, By Family Type ................................. 4

Federal Taxes and SNAP ................................................................................................................. 5

Federal Payroll Taxes ................................................................................................................ 6

Federal Income Tax Liability..................................................................................................... 6

The Earned Income Tax Credit .................................................................................................. 6

Child Credit ............................................................................................................................... 7

SNAP ......................................................................................................................................... 7

Net Income at the Minimum Wage Relative to Poverty, By Family Type ....................................... 8

Net Income of Minimum Wage Workers, By Family Type, in 2014 ......................................... 8

Raising the Minimum Wage in 2016 ....................................................................................... 10

Projected Gross and Net Income in 2016 Under Current Law .......................................... 11

Projected Gross Earnings and Net Income in 2016 Under a Minimum Wage of

$10.10 per Hour ............................................................................................................. 13

Increase in the Minimum Wage and Poverty..................................................................... 15

Considerations Related to Raising the Minimum Wage ................................................................ 17

Employment Effects ................................................................................................................ 18

Targeting Those Most In-Need ................................................................................................ 21

Considerations Related to Alternatives to Raising the Minimum Wage ........................................ 21

The Budget Costs of Earnings Supplements ........................................................................... 22

Work Incentives and Disincentives ......................................................................................... 23

Ongoing Income Support Versus Tax Refunds ........................................................................ 24

Potential Impact on Wages and Income ................................................................................... 24

Concluding Thoughts ..................................................................................................................... 25

 

Figures

Figure 1. Gross Earnings for a Worker Earning $7.25 per Hour Working Full-Time, Full-Year, Ratio to the 2014 Federal Poverty Guidelines by Family Type ........................................... 5

Figure 2. Ratio of Net Income to Poverty Guidelines of a Full-Year, Full-Time MinimumWage Worker, By Family Type in 2014 ...................................................................................... 10

Figure 3. Projected Net Income of a Full-Year, Full-Time Minimum Wage WorkerRelative to Poverty at $7.25 per Hour and at $10.10 per Hour, by Family Type in 2016 .......... 16

Figure A-1. Earned Income Tax Credit (EITC) Schedule, by Filing Status and Number ofChildren: 2014 ............................................................................................................................ 29

Figure A-2. Selected Annual Benefits and Taxes by Gross Earnings Level, Single Parentwith One Child, 2014 .................................................................................................................. 31

Figure A-3. Net Annual Income Relative to Gross Earnings, Single Parent with OneChild, 2014 ................................................................................................................................. 3

Figure A-4. “Implicit” Marginal Tax Rate (MTR) by Gross Earnings Level, Single Parent with One Child, 2014 .................................................................................................................. 35

Figure A-5. Average “Implicit” Tax Rate by Gross Earnings Level, Single Parent with One Child, 2014 .......................................................................................................................... 37

 

Tables

Table 1. 2014 Poverty Guidelines for the 48 Contiguous States and the District of Columbia ............................................................................................................... 4

Table 2. Earned Income Tax Credit: Maximum Credits and Income Levels Where the Credit Phases Out: 2014 ............................................................................................................... 7

Table 3. Gross Earnings and Net Income of a Full-Time, Full-Year Minimum Wage Worker ($7.25 per Hour), By Family Type in 2014 ...................................................................... 9

Table 4. Gross Earnings and Projected Net Income of a Full-Year, Full-Time Minimum Wage Worker at ($7.25 per hour), by Family Type in 2016 ....................................................... 11

Table 5. Ratio of Projected Gross Earnings and Net Income to Poverty Level Income for a Full-Year, Full-Time Minimum Wage Worker at $7.25 Per Hour, by Family Type, 2016 ............... 12

Table 6. Gross Earnings and Projected Net Income of a Full-Time, Full-Year Minimum Wage Worker ($10.10 Per Hour), by Family Type in 2016 ........................................................ 13

Table 7. Changes in Gross Earnings and Net Incomes from an Increase in the Minimum Wage from $7.25 to $10.10 per Hour, 2016 ............................................................................... 14

Table 8. Ratio of Net Income Relative to Poverty-Level Income for Full-Year, Full-Time Minimum Wage Workers: 2014 at Current Minimum Wage and 2016 Under Current Law Minimum Wage ($7.25 per Hour) or a $10.10 per Hour Minimum Wage ......................... 17

Table 9. Selected Benefits to Low-Income Families Not Based on Being Aged or Disabled, For Families with Earnings and Those without Earnings: FY2011 ............................ 23

 

Appendixes

Appendix. Implicit Marginal Tax Rates ......................................................................................... 27

 

Contacts

Author Contact Information........................................................................................................... 3

 

 

________________________________________________________________________

This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

 




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