Sunday, May 24, 2015

Turning the EITC Into A Monthly Wage Subsidy

I've stopped wading into policy details of things I don't know anything in particular about, but today I'll make an exception. Just a quick idea: why not turn the Earned Income Tax Credit into an explicit monthly wage subsidy? Alicia and I were talking about this the other day, so this week's editorial from Warren Buffett caught my eye. He calls for a more robust EITC instead of a higher minimum wage.

This makes an enormous amount of sense. The moral and practical need for redistribution of wealth is obvious to many of us, and that's the starting point for activism around the minimum wage. But the push for a $15 minimum strikes me as the wrong answer to the right question. It seems that advocates are correct that bubbles fueled by wealth inequality are economically destructive. I think they're also right that it is morally good to cultivate a society in which all work is honored and has dignity. That means structuring the market so that hard-working people have just rewards. It is not as though Jamie Dimon is some kind of hard-working phenom who has earned everything he has and people who can't make rent are doing something wrong.

But it's not at all clear to me how a $15 minimum wage is going to improve life, in the aggregate, for the working poor. It will be good for those who manage to retain their jobs, and it will boost wages up the income ladder because the floor will be so much higher. But I've seen no one explain how this would be anything but devastating to a lot of entry-level workers and teenagers. Businesses are not run as philanthropies. They will try to keep their labor costs down one way or another.

One way of looking at it is that the minimum wage and the EITC are both wage subsidies. But they are both inefficient. The former compels employers to pay workers more than they otherwise might, while the latter is hidden in the tax code and is only distributed once a year. Why not have a moderate minimum wage, indexed to inflation, paired with a revamped EITC that is explicit and consistent? If we want people to have a living wage, it seems to me that it would be less distortionary and less harmful to aggregate employment if the federal government provides the subsidy from general tax revenues rather than the employer doing it directly.

As it stands now, the EITC already makes the yearly income for my family and millions of others substantially larger than what our pay stubs throughout the year indicate. But that makes it difficult to plan and budget. It takes a lot of discipline and foresight to apply one lump sum to your expenses throughout the year. And what if tax law changes during the year? You really aren't sure if that money is going to be there in the end, and if you're living on the edge of your financial resources, this is not an academic question at all. And what if you don't know any better and get the "help" of one of the many predatory tax services companies that prey on the poor and take large chunks of their return?

So why not make the EITC explicit, a line item in your paycheck, doled out monthly? Yes, make it larger while we're at it. It seems to me that this would be extremely helpful for poor working families. It is stressful to be barely making it all year and then have a sudden cash infusion around tax time. We're already subsidizing workers, so why not do it transparently and consistently?

No comments:

Post a Comment