Wednesday, June 11, 2014

In Love With the Earned Income Tax Credit...But Not Enough to Tie the Knot

It's spring, and love, love, love is in the air! Yes, conservative intellectuals have fallen in love with the Earned Income Tax Credit, the federal program that subsidizes workers in low-wage jobs.

The source of this strange passion is, of course, recent Democratic proposals to increase the minimum wage, proposals with overwhelming popular support. Greg Mankiw, head of the Council of Economic Advisers under George W. Bush, makes the argument for the EITC over the minimum wage. It goes  like this:

Analytically, an increase in the minimum wage is identical to putting a tax on low-wage jobs, and then giving the revenue from the tax to low-wage workers. The good part is that we're raising the incomes of low-wage workers, who in many cases are below the poverty line. The bad part is that we're paying for it by taxing low-wage jobs.

Taxing low-wage jobs has a couple of problems. First, you would expect that taxing anything would reduce the amount of it. So there were would be fewer jobs available. Second, the net cost of the tax ends up being paid by employers. Why, says Mankiw, should they bear all the burden for a broader societal decision? The money should be paid by the government so that the cost is shared more broadly. (Actually, some of the cost to employers gets passed along to consumers as higher prices.  But again, why should consumers of those specific products pay all the cost?)

Then we should increase the EITC instead, right? So where should the money come from, and how much? What's Mankiw proposing?

As it turns out, Mankiw is a bit of a cad; rather than propose, he prefers to love the EITC and leave it. He concludes: "If, as a nation, we decide we want to do more to supplement the incomes of low-wage workers, that’s fine. But let’s do it openly, without artifice, and with broad participation." I never said I was in love with you...I just said that if I were in love, it would be with you and not your sister.

Then what are the possibilities? We could raise taxes. Or we could add it to the deficit, thus deferring to the future a decision about how to pay for it. Or we could cut military spending. Or we could cut domestic spending. Which of those options do you think Republicans would accept? In practice, Mankiw's idea comes down to this: let's supplement the income of low-wage workers, and let's pay for it by cutting food stamps. I wouldn't expect much impact on the poverty rate, would you?

If anyone tells you we should increase the EITC instead of raising the minimum wage, just ask how they suggest we pay for it.

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