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Policy: Budgets & Deficits

Here's the newest conservative alternative to the minimum wage

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Politics,Jobs,Labor,PennAve,Joseph Lawler,Economy,Budgets and Deficits,Minimum Wage,Poverty,Income Inequality,Earned Income Tax Credit

A top conservative economist thinks he has found a way to take President Obama at his word, and ensure that no one working full time has to live in poverty — while getting rid of the minimum wage.

It's the latest attempt to improve the Right's agenda as it relates to poverty and upward mobility in the U.S. — areas in which the GOP platform may have harmed Republican nominees with middle- and lower-class voters in 2012 — and it rivals ideas recently proposed by Republican officeholders such as Sen. Marco Rubio of Florida, Sen. Mike Lee of Utah and Rep. Paul Ryan of Wisconsin for raising workers' wages.

Douglas Holtz-Eakin thinks that his policy idea, which he calls the "Poverty Reduction Opportunity" or PRO wage, could replace not only the federal minimum wage, but also the system of tax credits intended to aid poor Americans.

Holtz-Eakin is the president of the right-leaning American Action Forum think tank, a former director of the Congressional Budget Office and a former economic adviser to the McCain 2008 presidential campaign. He says he got the idea a few months ago when President Obama "was running around talking about the minimum wage, which I think is a terrible antipoverty policy."

The minimum wage is problematic, says Holtz-Eakin, because it harms job creation and isn't narrowly targeted to benefit poor people. The Earned Income Tax Credit — the biggest federal antipoverty program, one generally recognized to encourage work — doesn't help low-income single men and women without children. It's also rife with mismanagement, with up to a quarter of payments made in error.

The PRO wage, spelled out in a research paper released Wednesday morning, would work by setting a target income for families that would place their household out of poverty if all income-earners in the family worked full time. The federal poverty line varies by family size.

Then, the government would simply augment their wages by as much as needed to ensure they met that target income.

So if a business only paid $5 an hour, a single worker with two children would receive a subsidy of $4.90 to earn a total wage of $9.90, putting him over the poverty line. The subsidy would come with his paycheck, with the employer simply remitting less in taxes to finance the disbursement.

The idea is that the wage would be targeted solely at poor workers and would not discourage work or job creation.

"There's some less-than-perfect features" to the idea, Holtz-Eakin acknowledges, "but this is not a world full of perfections."

In particular, it would be difficult to ensure that employees weren't gaming the system by downplaying the number of workers in their household, a key part of the calculation. "Everyone has an incentive to lie here," Holtz-Eakin admits.

It also would create an "income cliff" right at the federal poverty level of earnings, at which point workers would lose their subsidies, creating a high implicit marginal tax rate for earning an extra dollar. Furthermore, it would create a marriage penalty.

But those problems aren't as bad as the ones in the system now, Holtz-Eakin suggests. And he estimates the cost to the federal budget at just $17 billion to $34 billion, less than the roughly $60 billion paid out for the Earned Income Tax Credit.

The PRO wage, however, would not necessarily be a budget-cutting measure, Holtz-Eakin claims, saying that "you’d have to decide what the goal is."

Like the proposals from Rubio, Lee and Ryan, the PRO wage is instead intended to be an innovation in a policy space where Republicans are often seen as negligent.

"There’s an important debate, which is about poverty," not deficit reduction, explains Holtz-Eakin, adding that he's "less sympathetic to the president’s jihad against inequality," and that he wants "everything to be pro-work.”

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