Tax Credits, the Minimum Wage, and Inflation

Publication Date: December 2006

Publisher: Tax Policy Center

Author(s): Elaine Maag

Research Area: Banking and finance

Keywords: Tax Policy; Taxes and Social Programs; Taxation of Households; Low-Income Households

Type: Report

Abstract:

Two primary wage-support policies help low-income families: the minimum wage and targeted tax credits. Since 1997, when Congress last raised the minimum wage, the real value of the minimum wage has fallen about 20 percent because of inflation, while the earned income tax credit (EITC) and child credit have been expanded. This brief illustrates how current tax rules interact with the minimum wage and considers whether increased tax credits could substitute for minimum-wage increases for those earning the federal minimum wage. Increasing tax credits enough to substitute for raising minimum wage is probably infeasible because of the cost and the high marginal tax rates required. A more direct route to helping low-wage workers is to raise the minimum wage and index it to inflation.