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High Wages, Low Wages, and Poverty
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19648 |
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Section : |
MODERN THOUGHT
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| Issue
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10 / 1991 |
4,495 Words |
| Author
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Daniel Fusfeld
Daniel Fusfeld is professor emeritus of economics at the
University of Michigan. |
The United States has adopted an industrial policy that subsidizes low-wage employers. This is the result of two misguided policies: tax credits for the working poor, and a minimum wage law that permits poverty-level wages and exemptions even from those levels for many employers.
These policies reinforce the Third World economy that prevails in the poor areas of our large cities--and in some rural areas like the Rio Grande Valley in Texas. The chief impact is felt by blacks, Hispanics, and other minorities, thereby reinforcing this nation's already serious racial antagonisms.
Income tax credits for the working poor are the most insidious of the subsidies for low-wage employers--insidious because they purport to help the working poor with families--the "deserving" poor.
The most important is the Earned Income Tax Credit (EITC) originally passed by Congress in 1975 and increased in 1978 and 1991. The EITC applies to families with children in which at least one parent works but earns less than a poverty level income. A family with one child can obtain a tax credit of 14 percent of earned income; with two children, the credit is 21 percent; with three or more children, the credit is 25 percent. After a given level of earned income is reached, the credit is gradually phased out as earned income rises. The credit disappears entirely with earned incomes in the $20,000 to $30,000 range, depending on the size of the family. The worker must file an income tax return to claim the credit. If the credit exceeds the tax liability, the worker receives a check for the difference.
Starting this year (1991), a supplemental young child credit (for families with children under age six) provides additional income. The working poor are also eligible for a health insurance tax credit to compensate them for payroll deductions for health insurance.
The amount of these credits is quite significant for the poor. A family with three children, including a child under six in which one worker is employed full-time (2,000 hours) at the current minimum wage ($4.25 per hour) will earn $8,500 per year. This is about two-thirds of the poverty-level income for that size family. This family would be eligible for a tax credit of $2,125. Since the worker will owe no income tax on a income of $8,500 the credit will be an income supplement of 25 percent. The family will still be poor, however: A total income of $10,625 for a family of five is well below the poverty
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