Minimum wage versus Earned Income Tax Credit

Abstract

Minimum wage can be defined as the smallest hourly wage rate that a staff member paid as authorized by federal law. The wage rate was initially verified by collective bargaining by government rules and regulation, stating the lowest rate at which workers may be employed. A legal minimum wage rate is one permitted by government for all staff members in a society, with small number of exemptions. In other words, minimum wage is the least dollar amount that company must pay to non-exempt staff members per hour, as permitted by local, state or federal law. Most of the companies pay to the workers by hourly rate or in some other way like on commission basis. However, in any case, the amount of dollar that qualified staff members earn, divided by the total hours that they worked, must be equivalent to the current minimum wage rate.

Earned income tax credit is a tax credit for employees earning low incomes. Even employees whose incomes are so low to have paid taxes can get earned income tax credit. The idea is to decreases the income tax that for sure low-income tax-payers would otherwise be indebted. It is a refundable amount of credit; therefore if the tax that is outstanding is less than the amount of the credit, the difference is paid to the taxpayer as a refund. To meet the criteria for the earned income tax credit, a taxpayer must work and earn less than the government's limit for filing status and family circumstances, convene a set of particular situations, and file the required IRS plans.

Minimum wage versus Earned Income Tax Credit

Minimum wage can be defined as the smallest hourly, daily or monthly wage that employers may lawfully pay to employees or staff members. Consistently, it is the lowest wage at which employees may sell off their labour. Even though minimum wage rules are in effect in a great many authorities, there are dissimilarities of opinion about the profits, benefits and disadvantages of a minimum wage. The follower of the minimum wage say that is enhances or increases the living standard of employees and this will surely reduce the percentage of poverty. Whereas, challengers say that if it is more than enough to be effective, it increases the ratio of unemployment, specifically among employees with very low productivity because of inexperience or handicap, in that way to hurting lesser skilled workers to the benefit of better skilled workers.

Minimum wages were initially planned as a way to organize the explosion of sweat shops in manufacturing industries. The sweat shops provide services to large population of women and young workers, reimbursing them what were judged to be unsatisfactory wages. Nowadays, minimum wage laws cover up employees in most low-paid areas of employment. Even though, the objectives of the minimum wage are broadly admitted as proper, there is great discrepancy as to whether the minimum wage is much effectual in achieving its objectives. From the time of their introduction, minimum wage laws have been extremely controversial politically, and have received less assistance and support from economists as compared to the general public (Neumark, & Wascher, 2008).

Earned income is a scientific and practical term defined by the United States tax code. The below mentioned are the main sources for the earned income:

- wages, salaries, tips, commissions from outside sources and other taxable employee compensation

- earnings from self-employment

- aggregate income received as a statutory employee

- less population of disability payments

- non-taxable fight pays which an associate of the United States armed services opts to include exclusively for the motive of earned income tax credit calculation.

Earned income tax credit shortly known as EITC or EIC, is a refundable tax credit, it is means tested, and planned to support low-income employees of staff members and balance the burden of United States payroll taxes. In other words, it is a refundable federal income tax credit for small to reasonable income working persons and families. Initially, Congress granted the tax credit legislation in 1975 in part to compensate the load and burden of social security taxes and to offer an incentive to work. When earned income tax credit goes beyond the amount of outstanding taxes, the effects in a tax refund to those who claim and qualify for the credit. To meet the criteria for earned income tax credit, you must have earned income from employment, self-employment or any other resource and get together specific rules and regulations. Additionally, you must either meet the extra rules for staff employees or workers without a qualifying child or have a kid that convenes all the Qualifying Child Rules for you (Meyer, & Holtz-Eakin, 2002).

As, we have discussed about the basic introduction of both terms, now, we can decide which does more for families having low incomes? Raising the minimum wages or improving the earned-income tax credit, a cash bonus to be paid to workers earning low-incomes.

- By raising the minimum wage to 47.25, about 18% of the 12 million members of staff who were paid between the current minimum wage and $7.24 an hour rate were in families that had cash income under the federal poverty in 2004. All of the employees come under that wage range, rather than they received the amount of $7.25 per hour, they would have gotten about $11 billion in extra wages in the same year. About 15% of those extra and additional wages ($1.6 billion) would have been received by employees in poor families.

- Making better the earned income tax credit (EITC): It all depends on how accurately Congress altered the law, certainly, by increasing tax credits for childless workers and by also increasing the credits for families with three or more kids, would have cost up to $2.4 billion in 2004, with employees in families under the poverty line receiving $1.4 billion of the same.

The basic idea of both concepts is, families who received fewer amounts would have received a maximum tax credit, and those individuals who earned more amounts would have received a smaller amount of tax credit. Families whose tax credit crosses the amount of tax owed in reality receive a check from the government for the difference. The earned income tax credit is basically the same as a negative income tax, excluding that the eligibility for the program is restricted to the individuals who work. Similar to the statement, both the negative income tax and the minimum wage, the earned income tax credit places additional income into the hands of employees who worked at low wages. However, unlike the minimum wage, the earned income tax credit makes no incentive for employers to lay off low-wage staff members (Frank, & Bernanke, 2007).

Conclusion

As we have clearly discussed about both topics, minimum wage and earned income tax credit. We believe that the minimum wage is simply the second best option to the earned income tax credit and other shift to the worker belongs to the poor family. I believe that the traditional analysis of the minimum wage has a sensible amount and an individual would really have a preference to see more transfer payments to people, who are working and less efforts to accomplish the same objective through regulatory fiat.

References

Frank, Robert H., & Bernanke, Ben S. (2007).Principles of economics. New Delhi, India: Tata McGraw Hill Publishing Company Limited.

Neumark, David, & Wascher, William L. (2008).Minimum wages. Massachusetts, USA: Massachusetts Institute of Technology.

Meyer, Bruce D., & Holtz-Eakin, Douglas. (2002).Making work pay: the earned income tax credit and its impact on America's families. New York, USA: Russell Sage Foundation Publications.