A new Democratic proposal in Congress helps illustrate the important and underappreciated problem of big government tending to perpetuate its own growth.
The proposal in question is to more than double of the federal minimum wage to $15 per hour. The most obvious problem with raising the minimum wage, especially by such a large amount, is that it will throw many more people out of work than it will lift up from poverty. The nonpartisan Congressional Budget Office estimates that only 900,000 people will reap the benefits, whereas at least 1.4 million are expected to lose their jobs because employers will not be above to bear the increased cost of labor while remaining profitable.
But don’t worry, Rep. Ro Khanna, Democrat of California, is here to help.
Khanna needed to make amends for an embarrassingly simplistic and arrogant television appearance in which he had said, “I don’t want small businesses that are underpaying their employees.” By underpaying, he means paying what the employer and employee have agreed but which Khanna, poking his nose into other people’s business, decides is improper. The word “underpaying” suggests there is a dollar number that is proper, that is what the work is actually worth. But if it is not worth that to the person who’d have to pay it, to whom exactly is it worth that sum?
But Khanna, as noted, claims to have a solution. He is proposing a tax credit for small retail businesses to defray their additional expenses and encourage them to hire more local workers. His idea is that one hand of big government will help employers cover the artificial added expenses of wages fixed arbitrarily by the the other hand.
You can probably see that there is something wrong with this picture. The government’s left hand ought to know what its right hand is doing, right? You probably think there’s a better way of helping low-income workers than to strain their employers’ balance sheets, messing up their job prospects and making the business dependent on government largesse.
Yes, there is a better way. It is called the Earned Income Tax Credit. The EITC is available to precisely the sort of low-income workers who labor near the minimum-wage level. For tax 2020, a married couple with two children, both working full-time minimum wage jobs, would be eligible for an EITC worth $5,920. Importantly, this credit is refundable, which means that whatever amount of the credit you don’t owe in taxes, you get to keep in the form of cash. (There are also 26 states with their own EITC.)
The EITC is viewed as a very efficient way of helping the working poor without disincentivizing work or brutally punishing employers for hiring people. That’s because, unlike Khanna’s penalize-then-subsidize plan for businesses, the money goes directly to the people who need it.
One way Congress could help low-income workers without imperiling their employment prospects would be to make this credit more generous. Congress could raise the maximum benefit, lower the threshold at which workers reach that maximum, change the phase-out calculation, or take some combination of these steps.
This would ameliorate the problem of people working yet living in poverty but without the maladies that minimum wages cause, without hastening the automation of low-income jobs or the destruction of small businesses.
But then, where’s the fun in giving the poor such an income boost, when you can instead manipulate employers, forcing them to shoulder the burden of your generosity as a politician?
Correction: An earlier version of this editorial mistakenly stated that California lacks a state earned income tax credit.
