February 15, 2013
The $9 minimum wage proposed in the SOTU is less than the $9.50 that Obama proposed during his first campaign. For a full-time worker, that’s about $1,000 less per year. And, as Tim Noah has noted, if adjusted for inflation, that proposed minimum would be around $10 (or $2,000 less) today.
In response to questions about the difference, the White House makes this argument: “Obama was able to secure refundable tax credits that are worth 75 cents an hour for someone with two children who works full-time, [NEC Deputy Director Jason] Furman said, ‘so if you think of that extra money together with the extra money from this minimum wage increase, the two of those together would first of all exceed the minimum wage number he called for on the campaign.'”
Hmm, no.
The problem here is that in his 2008 campaign, President Obama proposed not only a $9.50 minimum, but also a more extensive set of refundable tax credits than the ones now in place. The tax credits the President proposed in 2008 that have not been adopted include:
- a refundable Making Work Pay Tax Credit, which as originally proposed would have equaled 6.2 percent of earnings up to $500 per worker (a $400 per worker MWP was in place for 2009-2010);
- making the Child and Dependent Care Tax Credit refundable and equal to 50 percent of child care expenses less than $6,000;
- a refundable “Universal Mortgage Credit” equal to 10 percent of mortgage interest for nonitemizers up to $800;
- more than doubling the currently very small EITC for childless workers (under the maximum credit for childless workers would have increased from $452 in 2009 to $1,110 in 2012);
- making the Saver’s Credit refundable and changing it to a 50 percent match of the first $1,000 in savings; and
- a refundable American Opportunity Tax Credit equal to 100% of the first $4,000 of college expenses (as extended in the fiscal cliff deal, this credit is capped at $2,500).
One tax credit change that was included in the Recovery Act and the fiscal cliff deal, but not (I believe) in the original Obama tax plan is making the Child Tax Credit refundable for families with earnings above $3,000 (in 2008, a family could only claim a refundable CTC for if they had earnings above $12,050).
The bottom line: For most low-wage workers, the package originally proposed by the President in 2008 of a higher minimum wage ($1,000 to $2,000 more) plus a more extensive set of refundable tax credits will easily exceed the $9 minimum and the current set of tax credits. This is especially the case for families with child care expenses and for workers without children.
Consider the example of a single parent with two children who is working full time at $9 an hour. Before taking child care expenses into account, this family’s net income (gross earnings minus payroll taxes plus tax credits) will be $24,500.
With a $9.50 minimum wage, their net income would be about $1,000 more ($25,422), and at $10.15 (the 2008 pledge adjusted for inflation since then), the family would be at $26,641. And, if we add just two elements of the original Obama tax plan that were left by the wayside, the Making Work Pay tax credit and the Child and Dependent Care Tax, their income with a $9.50 minimum would be $1,500 (assuming they had no child care expenses, which is very unlikely) to $4,500 more than what it will be with a $9 minimum and current tax credits.
Furman’s argument seems to be that the provision in the fiscal cliff deal that lowers the refundability threshold for the Child Tax Credit makes up all the difference. It probably makes up about $1,000 of the difference for this single-parent family, but that still falls short of the original plan, especially once you take account of child care expenses.
And, once you take account of child care needs, it really falls short of the original plan, as well as minimal standards like the poverty line In 2010, among families with employed mothers who made child care payments, those payments averaged about $7,200. For our single-parent family, the original plan would have offset $3,000 of that amount.
Similarly, a childless worker does much worse under a $9 minimum plus current tax credits than under a $9.50 or $10.15 minimum. The tax credit provisions Furman trumpets do nothing for her, and the Administration seems to have abandoned the provisions form its original plan (particularly the Making Work Pay credit and increase in the childless worker EITC) that would have boosted her income by roughly another $1,000.
Finally, I’m a fan of refundable tax credits, but there’s a basic question here of whether we’re getting the balance between wages and credits right. For our single-parent family, nearly one-third of their annual net income will come from tax credits, and all in a single refund check. Claiming that refund check, typically costs the parent time and money, and not getting more of that money in their regular paycheck often means they’re incurring additional credit costs during the year. Moving forward, we need both a minimum along the lines of the $10.10 Senator Harkin and Rep. Miller are calling for, as well as the missing pieces of original Obama tax plan.
