However, it is important to reduce the gross minimum wage simultaneously with introduction of the tax credit (or exemption), to the point where subsistence equals the net minimum wage. The minimum wage should only be binding at subsistence, and subsidies (possibly in the form of EITC) are needed for those working below the minimum wage.
(3) Hotz & Scholz (2000:34): “At its core, targeted hiring subsidies have a different objective than the EITC. The EITC is designed to augment the incomes of low-income families. The WOTC and Welfare-to-Work tax credits are designed to stimulate employment of targeted groups.”
(a) This obscures the clarity that one should solve unemployment by getting rid of the tax void, and then look at details. (b) Subsidies to the employee or the employer are to a large extent interchangeable though they may be different dynamically. (c) The difference between persons and families should be dealt with in the tax code.
(4) Hotz & Scholz (2000:34): “The EITC has always been closely linked to the payroll tax. A commonly given rationale for the credit prior to recent expansions was that the EITC offsets the regressive (on an annual basis) burden of payroll taxes.”
However, a similar confusion existed with the Dutch Government “Tax Plan for the 21st Century”, see chapter 29 above.
(5) Hotz & Scholz (2000:34-35): “Proposals that exempt the first $x of earned income from payroll taxes would be administratively difficult for workers who have more than one job or who change jobs during the year. Underpaid taxes could be reconciled at the end of the year on individual income tax forms (as is done with overpaid payroll taxes for affluent taxpayers), but some taxpayers would fail to file, creating a new compliance headache. Revenue neutral proposals that would exempt a portion of earnings, and then tax additional earnings at higher rates would exacerbate the redistribution involved with social security. In particular, money’s worth calculations show that social security is a bad deal compared with alternative, safe investments for affluent singles and couples. (Calculations of this sort tend to ignore the value one should place on the insurance aspect of social security against disability, unusually long life, and the randomness of endowments.) As social security is perceived by affluent families to be financially unattractive, pressure could mount for drastically altering social security. Given the importance of the programme in alleviating poverty among the elderly, we think that would be an unfortunate turn of events.
However, these are other issues than the proposal to get rid of the tax void, and should not obscure that matter. Note that taxation always requires administration and collection, so that it does not help to call these a ‘headache’.
(6) Hotz & Scholz (2000:35): “In some contexts, one might envision payroll tax reductions being paired with reductions in mandated benefits, which could help the flexibility of low-wage labour markets. In the US, however, it seems unlikely that payroll tax reductions would be matched with reductions in social security, the programme the taxes finance. Consequently, there appears to be no compelling reason why payroll tax reductions would be a preferred policy option to further expanding the EITC.”
However, this is unwarranted. At issue are net income and benefit that are at subsistence already. Benefits are net anyway (since the government assigns a gross value but immediately cashes the assigned tax). It is strange to suggest that payroll tax reduction can only be justified by reduction of benefits.
(7) Hotz & Scholz (2000:36): “(Advantage of wage cost subsidy …) relative to the EITC. First, in the presence of a binding minimum wage, employer subsidies may be more effective, both in stimulating employment and increasing employees’ after-subsidy wage rates. This is because the wage floor imposed by the minimum wage may keep the employer’s pre-EITC wage payments from falling to their market clearing level. With the employer subsidy, the post-subsidy wage is the relevant wage applicable to minimum wage laws. Hence, employer subsidies might be useful to mute harmful labour market effects of the minimum wage.”