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Better than Raising the Minimum Wage

The minimum wage has come off the front page recently as the economy expands and other matters of national interest steal column inches from the headlines. The issues haven’t gone away. The minimum wage is sure to rear its ugly head again.

In the past the argument revolved around how much to raise the minimum wage if at all. Forcing wages higher can cause job losses, accelerate automation or cause businesses to close due to the additional overhead. On the other hand, working full-time at minimum wage is getting near impossible to survive on. There has to be a better way.

In 2015 Warren Buffett wrote an op-ed piece for The Wall Street Journal saying a carefully crafted expansion of the Earned Income Credit could solve the problem. The title of this post is from that op-ed piece.

Buffett’s recommendation has merit. There are issues, however, surrounding his suggestion which we will address here. We will go one step further and expose a massive tax break many small businesses are allowed but forget to claim. Even tax professionals miss this break in embarrassing numbers.

Issues from Both Sides of the Debate

A blog focusing on personal finance, wealth accumulation and preservation and tax issues will find itself in hot water over politics periodically. Unfortunately, when money is involved it can become politicized. Taxes are even worse. Suggesting tax policy invites personal harm. The only choices for me are to avoid the tough issues and provide cream puff articles or brave the turbulent waters. The minimum wage is too important an issue to ignore. So into the water I go.

The nice thing about the debate on raising the minimum wage is that both sides are right. Forcing wages higher at the low end of the wage scale risks reducing the number of entry level jobs many people depend on. A higher minimum wage also forces employers to reconsider hiring candidates who show promise but will require serious training. Training at $15 an hour is different from training at $8 an hour. The investment by the business owner can be too great, knowing the employee can sell her experience to any employer after the training is completed.

Minimum wage versus federal rate as of January 1, 2016: Green: Higher; Blue: Same; Red: Lower; Yellow: No minimum wage law

My moral compass, however, requires me to consider my fellow man. I like a higher minimum wage to reward people for productive labor.

When the minimum wage comes up for debate the battle is bitter. Each side’s argument is valid. The real debate is: Is it better to have fewer jobs at a higher rate for those who do. Some even suggest there should be no minimum wage!

Twenty-three states either have a lower minimum wage than federal (but employers must still pay the federal rate), no minimum wage law or follow the federal rate. This means over half of all states have a higher minimum wage for their workforce.

Seattle made news when they moved to a $15 per hour minimum wage; small businesses have a lower minimum wage until 2021. Other jurisdictions have increased the minimum wage in similar fashion. The drive is strongest in high cost of living areas.

The first anecdotal evidence is starting to trickle in; there is some job loss at the low end of the wage scale. This makes sense. If something costs more (labor), the buyer (employers) will have a lower demand for labor. Overall wages of everyone combined is higher. It also causes businesses to raise prices to cover the additional costs. These additional costs are passed on to consumers.

If the employer serves the local market only the playing field in level. If competing in a national or international market the employer could be at a disadvantage.

Fixing the Problem

Raising the minimum wage is the right thing to do as a conscientious human being, but there is a cost. The debate has been narrow since the inception of the minimum wage in the United States. The current minimum wage started at $.25 an hour in 1938, equivalent to $4.24 in 2015 dollars.

The minimum wage has risen over the years and reached a peak in buying power in the U.S. in the late 1960s when the rate reached nearly $11 an hour in 2013 dollars.

The debate is about a living wage for people working for their bread. No one denies people who work full-time shouldn’t earn enough for a reasonable living standard. The goal is to keep as many jobs as possible while encouraging people to join the workforce.

The Earned Income Tax Credit (EITC) began under the Republican administration of Gerald Ford in 1975. The EITC was supposed to be a temporary refundable credit to help low income workers pay for the increasing cost of food and fuel. Like most government handouts, it became permanent.

The EITC generally helps families with children. A few years back people without children could also receive an EITC if their income was VERY low.

Buffett’s suggestion is to expand the EITC. At first I hated the idea. Over the last twenty years tax returns have increased in complexity as government welfare services were shifted to the tax preparer’s office. The litany of credit for both businesses and individuals has increased the tax professional’s work load tremendously over the years. It also saves the government money as the tax office determines most of the eligibility to the benefit now.

My original hate for more tax credits involves fraud. Fraud in the tax office was limited three decades ago. With all the juicy credits now on a tax return, fraud procedures are a serious part of tax office policy if the tax office wants to stay in business. Things have changed over the years.

The time involved verifying information is a serious cost preparing every tax return. It increases preparation fees faster than the inflation rate while the taxpayer doesn’t understand why her fee is skyrocketing.

The EITC is the largest area of fraud on the tax return. And I think Buffett’s idea to expand it is a good one because we can prevent fraud while incentivizing work ethic and without punishing business owners.

Generally, the EITC is a credit claimed on the tax return and is refundable. This means you don’t need a tax liability to benefit from the credit. The biggest drawback of the EITC is when it is issued. If you are struggling to pay the rent in June, the tax refund due next spring is not going to do much good.

In the past employees could get a pro rata portion of the credit with their paycheck. Few used the opportunity because it was hard to understand. This option is no longer available.

My suggestion to rework the EITC is to take it off the tax return completely except for a year-end reconciliation to determine if the taxpayer is owed an additional amount.

The current EITC is complicated. You can be too old or young to claim the credit. The definition of a child for tax purposes is a longer discussion than even a fully devoted post could cover. Having children helps a lot in determining your credit.

You can game the EITC legally too. Cheating is rampant and the IRS and Congress know it. The credit starts small and increases until you hit the sweet spot (the level where the credit is highest) and then declines.

The number of children involved affects the credit. In effect, once you move above the sweet spot your tax rate increases as the credit declines; effectively, a higher tax bracket for those on the bubble.

If we required the EITC be provided employees with each paycheck it would do the most good when it is needed. Instead of a minimum wage we could have a minimum credit wage. If an industry could only support wages at say $10 per hour, the EITC could be set at $15 per hour. The employer pays the employee their wages normally and includes an additional $5 per hour on the same paycheck as a separate line item. The employer would get an immediate credit on her payroll tax report with a refund available no more than month later to employers who have more credits paid than payroll taxes due.

Some states, like Wisconsin, also have their own EITC. States and cities with high costs of living could institute their own EITC to deal with the minimum wage they wish to set. If Seattle wants a $20 an hour minimum wage, they can piggyback the federal program and provide proper funding.

Local businesses will no longer be at a disadvantage on a national or international level. A program like this would ensure maximum jobs with the lowest stress on the job creators. This modified EITC would also self regulate as the economy went through its normal ups and downs. An employer might be able to lower employee wages during a recession without the employee seeing a smaller paycheck. Good for the employee who keeps her job and good for the employer who has less financial stress during economic hard times.

My Gift to You

As promised at the open, I have a gift for my business owner readers.

People reading this post probably have a vested interest in the outcome. When it comes to the minimum wage, restaurants generally top the list of employers paying the minimum wage or close to it. And there is a massive tax credit for businesses with employees who are paid tips.

Basically, the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips is a fancy way of saying employers can get a 7.65% credit for FICA taxes paid due to tips employees receive when the amount of the wages and tips combined exceeds $5.15 per hour.

I see this credit missed by tax professionals all the time. The credit is also reported on K-1s. When I have a client with a K-1 from a restaurant and no tip credit listed I know it is wrong. I send the client back to the business return tax preparer to get it fixed. The credit can be massive.

Even a small restaurant can have over $5,000 of tip credit per year. Business is challenging in the best of times. Employers with low wage employees really can use the tax break. Employees get the EITC and other tax breaks and the employer gets the tip credit.

It could be job security for all parties involved.


What do you think? Do you like my solution? Did Buffett have a great idea? What about eliminating the minimum wage and using my idea of the EITC to replace it? Should people with children receive a higher guaranteed EITC or minimum wage? Where should the tax money to pay for this come from?

I am interested in your thoughts. Technology is causing significant dislocation. Some people do well, others, not so much.

We can be a caring society with a powerful moral compass without harming business owners.



Wednesday 17th of January 2018

I like your idea on including the EIC with a regular paycheck. The way I see it as it is now, and like you said, getting a refund once a year doesn't help with the bills when they need it the rest of the year. Another problem with that, as we know all to well, is that a lot of people in that situation get the big refund check and all the sudden think they can afford that $1000 flat screen tv or the down payment on that new car they want. I see it as you see winning the lottery. It will be nice for a bit, but unless you are financially literate, (and not to sound mean, but a lot of those people aren't) all it does is fuel the consumerism.


Wednesday 17th of January 2018

Not only do I not think it helps those people, it also may make them WORSE off than they were if they use that money for that new car!! You save to afford it the rest of the year, what makes you think you can afford it now?


Friday 8th of September 2017

I have to push back here: "Raising the minimum wage is the right thing to do as a conscientious human being... " By raising the minimum wage, you are essentially banning low productivity workers from legal work. You're telling the most vulnerable in our society (well, at least the most vulnerable that can do any work at all) that it is better they receive no wages so that people better off than them can receive higher wages. Maybe that's the right policy, but at best it's the slightly less reprehensible policy choice, not the obvious "right thing to do as a conscientious human being".

Aside from that, the EITC is better than the minimum wage on just about every measure. The benefits of an EITC are more targeted than the minimum wage (i.e., Ignoring fraud, the EITC goes to people in need; around 2/3 of minimum wage earners are in non-poor households) and the costs are more equitably shared (costs are paid by tax payers in general, not irrationally targeted at employers of low productivity workers and customers/clients of businesses employing low wage labor) and it doesn't require barring the most vulnerable workers from the legal labor market.

The only drawback to the EITC (provided you design it right to avoid excessively high implicit marginal tax rates) is the potential for fraud. That's certainly not nothing, but at the very least it should be shown that the fraud is huge (it is) and cannot practicably be reduced to a manageable levels (to my knowledge unaddressed) before foregoing it in favor of a policy with the drawbacks of minimum wage.

Keith Schroeder

Friday 8th of September 2017

I don't think we disagree. My statement on raising the minimum wage is meant as happening in a vacuum. Of course everybody is happy to see people working a full-time job earn a living wage. But new world economic make it more and more difficult to raise the minimum wage without dislocation and job loss in some industries. Enjoyed your well thought out comment.

Tina Gleisner

Tuesday 5th of September 2017

Wow, I know little about this topic so your review & ideas were very helpful. I do expect that all of this will come under more scrutiny over the next 10 years & wonder how the gig economy will affect it too.


Friday 1st of September 2017

I agree with Bill in that the minimum wage was not meant to be a living wage. When I was a teenager in the 80s, the minimum wage was the domain of high school students. Even seasonal workers such as summer lifeguards made more money. Minimum wage was for people with no experience who required basic job training. Unspoken in that arrangement is that minimum wage was for teenagers who lived at home and needed a) some work experience or b) some money (spending money or college tuition). At some point, you have seen a transition where people with children are working minimum wage jobs. I think welfare reform caused it but regardless, the attitude towards minimum wage has morphed into a living wage. I can't recall who said it but I recall reading a quote (paraphrasing) "if raising the minimum wage is such a great thing, let's just raise it to a $1,000,000 per year." You allude to that, if McDonald's has to pay all their workers $15 per hour, they will have to charge $10 for Big Mac. They're not going to sell very many although one economic theory states that if you raise the minimum wage up, retailers at the bottom end of the spectrum will raise their prices and the workers end up at the same place. If workers are making $7.50/hour and Big Macs are $5, their buying power is exactly the same if they are making $15 per hour and Big Macs are $10. They have to work 40 minutes to pay for the Big Mac. Anyway, companies will automate and outsource if you raise the minimum wage too much. It will results in layoffs in jobs that are mostly staffed by minimum wagers. To me this always comes back to education. If you have people graduating high school with 3rd grade math skills & functionally illiterate, that person will have a hard time earning enough to raise a family much less take care of his own financial needs. You can blame public school teachers union or bureaucrats or the breakdown of the nuclear family or institutional racism but I think it is folly to address this problem by raising the minimum wage. Is the EITC the solution? It seems to me that it will give employers an incentive to keep wages low and as the living wage increases, the EITC will increase. In effect, the taxpayer will be subsidizing the minimum wage worker's salary, McDonald's profits and the Big Mac purchaser's spending habits. At least with raising the minimum wage it is the employer & customer that is paying for the worker's wages.

Douglas Stainton

Friday 1st of September 2017

To encourage personal responsibility we should make the first $10,000 in interest and dividends tax free!