Morning Must Reads: EITC Awareness, New Economic Geography and Stigmatizing The Hungry

Today is Earned Income Tax Credit (EITC) awareness day! 

EITC, the Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

Since we are on the topic of the EITC, today is a good day to highlight a proposal to strengthen both the minimum wage and the earned income tax credit so that they are more effective tools for reducing poverty.

..we begin by proposing a 70 percent increase in current minimum wage rates. This would raise the federal minimum from today’s rate of $7.25 to $12.30 per hour.

We also propose two expansions of the EITC, the federal program that provides tax relief and cash benefits for low-income working families. These include raising the maximum EITC benefits by 80 percent and the income eligibility threshold to three times the federal poverty line. The maximum EITC benefit would rise from $5,028 to $9,040 and households with incomes up to $57,000 could receive some benefit.

In combination, these two policy measures would guarantee 60 percent of all low-income working families a decent living standard through full-time employment. The other 40 percent of low-income working families offer more difficult challenges, because they either live in high-cost areas or they depend on only one wage-earner to raise children. But our proposed measures would substantially improve conditions for these households as well. Current policy terms guarantee a decent living standard for only 12 percent of low-income working families.

By strengthening both the minimum wage and EITC in combination, we take advantage of how they can operate in complementary ways—that is, with the strengths of one policy making up for the weaknesses of the other.

The minimum wage, if raised too high, could cause business costs to rise significantly and in response, employers could potentially lay off workers or cut back on their hours.

The EITC program has the advantage of supplementing the earnings of low-income workers without raising business costs. Generous EITC benefits, however, tend to draw more people into the labor force and allow employers to pay less while still attracting the workers they need. A robust minimum wage rate would prevent wages from falling too low due to the EITC.

Everyone's favorite rhetorical device maker, Steve Jobs has loomed large in policy debates about inequality and industrial policy in past several weeks.  After the State of the Union, Paul Krugman pointed out, in reply to Indiana’s governor Mitch Daniels that the government rescue of GM and Chrysler protected hundreds of thousands of U.S. jobs. The Economic Policy Institute in December 2008 estimated the collapse of the auto industry would put at risk 120,000 jobs in Pennsylvania alone. Apple employs about 43,000 employees in all of the United States.

Krugman returns to the topic this morning and offers up some of the lessons he learned from the research that earned him the Nobel prize in economics — new economic geography (PDF).

This is familiar territory to students of economic geography: the advantages of industrial clusters — in which producers, specialized suppliers, and workers huddle together to their mutual benefit — have been a running theme since the 19th century.

And Chinese manufacturing isn’t the only conspicuous example of these advantages in the modern world. Germany remains a highly successful exporter even with workers who cost, on average, $44 an hour — much more than the average cost of American workers. And this success has a lot to do with the support its small and medium-sized companies — the famed Mittelstand — provide to each other via shared suppliers and the maintenance of a skilled work force.

The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.

The Philadelphia Inquirer reports on a disturbing tit-for-tat exchange on food stamps between U.S. Secretary of Agriculture Tom Vilsack and Gov. Corbett's spokesman Kevin Harley.

Secretary of Agriculture Tom Vilsack, in Philadelphia to discuss President Obama's State of the Union message, said the asset test "is not going to save the Commonwealth a single dime," and would, in fact, cost the state money to implement...

Responding to Vilsack's remarks, Kevin Harley, Gov. Corbett's spokesman, said: "It doesn't surprise me that the man whose president has overseen the greatest increase in food-stamp usage in the history of the United States would be critical of any Republican governor attempting to impose an asset test. Because of President Obama's economic policies, 11.2 million additional Americans have been added to the food-stamp rolls."

Recessions drive up unemployment, thus creating a need for food assistance. We are now recovering from one of the worst recessions on record. Pennsylvania's own recovery initially started out strong but thanks in part to state budget cuts Pennsylvania has created fewer jobs in the last 12 months than it did in the previous year. Perhaps we all can agree to avoid stigmatizing people who are in need because the economy is weak.


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