Thursday, July 20, 2006

Damning the Earned Income Tax Credit with Faint Praise

With some very notable exceptions, very few advocates of raising the minimum wage discuss the alternative of expanding the Earned Income Tax Credit (EITC). Indeed, as I pointed out in a previous blog post, the EITC is a very well-kept secret, even among economists, so I've found that the most effective way of changing people's minds about the minimum wage is by simply making them aware of the existence of the EITC. However, some people just don't get it. To wit, notwithstanding the clear and incontrovertible facts about the effectiveness of the EITC as a way of helping the working poor escape poverty and the corresponding futility of raising the mininum wage, many people will argue that we still need to do both. Others will question where the money for an expansion of the EITC would come from, ignoring the fact that the same exact question should be raised whenever someone advocates raising the minimum wage.

Ignorance of the EITC among laypersons is understandable. It begins and ends with the most well-informed and well-educated economists, most of whom seldom discuss the EITC. Those economists who do discuss the EITC seldom discuss it in the context of being an alternative to the minimum wage. As such, by the time viewpoints on the EITC and the minimum wage filter down to front line advocates for the working poor, they are wholly disocciated from each other, and using the fuzzy logic that most front line advocates use, one could easily conclude that "we need both." On the other extreme are people who believe that we need neither one.

While few people would argue against helping the working poor, many libertarians who stick to the party line would argue that EITC benefits are charity, and that charity should be voluntary rather than being government-sponsored. Speaking as a lifelong libertarian, I wholheartedly disagree. To wit, EITC benefits can be justified as a way of protecting one of the most vulnerable segments of society from oppressive taxation. To the extent that EITC benefits exceed income taxes paid, they can be seen as compensation for various indirect taxes that consume a large portion of the income of the working poor. Finally, to the extent that EITC benefits exceed any and all taxes paid by the working poor, they can be justified by virtue of the fact that they reduce other forms of entitlement spending.

To be clear, the EITC is not a perfect solution, but it is a very, very good solution in that it targets economic relief towards the working poor, which is the biggest reason that an expansion of the EITC should be favored over an increase in the minimum wage. To wit, I frequently encounter people who argue that "no one can live on the amount of money that they make working full time at minimum wage," and that's simply not true. People who work full time at minimum wage can and often do live quite well by living with roommates, parents, and spouses. Some people actually work full time for less than minimum wage and still live quite well, whereas most of the working poor make a great deal more than minimum wage and still live in abject poverty.

EITC benefits target economic relief for the people who are most likely to be living in abject poverty, whether or not they are making more or less than the prevailing minimum wage. To wit, single parents with two children who make between $11,000.00 and $15,000.00 per year get a $4,400.00 tax credit that lifts millions of these families out of poverty every year. Probably the best way to improve the EITC would be to offer even larger benefits for families with three children where the poverty rate is double that of families with fewer than three children.

Ignorance of the EITC is a somewhat fixable problem being addressed by people like former President Clinton and John Hope Bryant of Operation Hope. At the other extreme are people like blogger "Litwin" of the Social Justice Blog who are damning the EITC with faint praise:
"I don't think I've ever discussed minimum wage in this blog without at least mentioning the Earned Income Tax Credit and similar programs, I want to point that out here again. Certainly, no discussion of minimum wages can be fair and honest without pointing out that programs like the EITC has increased the amount of money in our lowest wage workers' pockets at the end of the day. But such increases are not enough to compensate for the loss in buying power of the minimum wage, the programs are not utilized by a decent portion of the eligible population, and they are considered a hand out rather than truly 'earned income' by many recipients."
Contrary to what Litwin asserts, EITC recipients do not consider their benefits a handout. While the EITC is far from perfect, it is a highly effective way of helping the working poor whereas any argument in favor of raising the minimum wage is (at best) a red herring.

2 Comments:

Blogger Litwin said...

I hope you are right that EITC recipients don't consider it a handout, though unfortunately I think many do. I didn't just make that up or pull it out of the sky. Many reports on interviews with EITC recipients leave one with the impression that a dollar earned through an EITC program (at any level) is just not thought of the same way as a dollar earned through wages. I'd be interestedd to know where your opinion is coming from because I'm not interested in being correct here, but only in being accurate.

Giving our poorest workers free food or free housing would also be incredibly effective, but it would also be considered a handout rather than legitimately earned money--so to speak.

Of course, many people (even if I'm on track with this line of reasoning) still consider a dollar to equal a dollar and know that they did earn the money since their cousin sitting on the couch all day doesn't get EITC money. You need to work and that's what makes the program so popular across the political spectrum. On that, at least, I think we can agree.

3:47 PM, July 24, 2006  
Blogger Internet Esquire said...

"Many reports on interviews with EITC recipients leave one with the impression that a dollar earned through an EITC program (at any level) is just not thought of the same way as a dollar earned through wages."

I've not seen any of these reports or interviews, but my personal experience with EITC recipients has been exactly the opposite. Tax breaks are usually usually the province of the wealthy and the educated. As such, EITC benefits are usually perceived to be the little guy's way of "sticking it to The Man." Moreover, EITC benefits tend to encourage workforce participation by single mothers, displacing entitlement programs such as food stamps and welfare payments that carry a very powerful stigma.

2:54 PM, July 25, 2006  

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