A top Republican policy expert endorsed the idea of wage subsidies as a replacement for the minimum wage and the Earned Income Tax Credit, the two main ways the federal government tries to prevent workers from falling into poverty.
In a new study for the Manhattan Institute, former Mitt Romney domestic policy director Oren Cass makes the case for “a wage subsidy delivered directly to low-wage workers, via their paychecks.”
Cass, a senior fellow at the right-leaning nonprofit Manhattan Institute, argues that wage subsidies would be an improvement over the current laws, even though it would mean conservatives “accepting the fact that spending public funds is not bad policy per se and that progress will require spending money more wisely.”
In his version, the government would set a target wage and then subsidize wages to make up part of the difference between prevailing wages and the target wages. The subsidies would be added to employees’ paychecks, with employers deducting them from the payroll taxes they send to the government or quickly being reimbursed by the Treasury.
Wage subsidies are preferable to the minimum wage, Cass argues, because they create incentives for more hiring, rather than for less. Also, his plan would pass costs onto taxpayers but not consumers.
Cass also says wage subsidies would also be preferable to the Earned Income Tax Credit, which gives low-income families a refundable credit for work. Some Republicans, such as House Ways and Means Chairman Paul Ryan, favor expanding the credit because it incentivizes work.
Because the credit is often rebated during tax season, Cass says, recipients miss out on the funds initially and often don’t realize they receive them. The subsidy would come with each paycheck and would present a more clear motivation to work.
The idea of wage subsidies is not new and has been championed by Nobel Prize-winning economist Edmund Phelps, Cass notes.
In 2012, Romney ran on support for increasing the federal minimum wage, currently set at $7.25 an hour, in some circumstances. His tax plan would have undone an expansion of the Earned Income Tax Credit passed as part of President Obama’s 2009 stimulus plan.
