Battlepanda: For or against the EITC?


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Saturday, November 19, 2005

For or against the EITC?

Most of the analysis I've seen seem to assume that the Earned Income Tax Credit distorts labor markets less than a rise in the income tax. Matt Singer poses a contrarian view:
The EITC works basically as a negative income tax for working families. Low-income workers who are eligible for the credit actually receive money back from the government despite paying no income tax (although, in reality, this "refund" actually just offsets payroll taxes). Now, some people like to describe the EITC as America's most effective anti-poverty program, but it, like high payroll taxes, is actually a disincentive to America's employers to provide higher wages[.]

[T]he EITC doesn't guarantee a minimum income, it doesn't create quite the same level of perverse incentives, but it does effectively give businesses something for nothing.
Now, I would like to hear more empirical information on what the effects of the EITC has been, but Matt certainly presents an interesting argument. Certainly, the total number of jobs sustained in the low-end of the economy would be larger with an EITC program than with a higher minimum wage. If standard economic theory is worth its salt at all, the EITC must surely decrease the price of labor unless there is absolutely no unemployment in the economy. In effect, the taxpayer subsidizes businesses into creating more, albeit crummier-paying, jobs. But the big infusion of tax dollars required to pay for the program might negate the benefit of that extra employment. If one has no moral reason for preferring that everybody must be kept working all the time, it might be cheaper to institute higher minimum wages, and redeploy part of the tax dollars we would otherwise spend on unemployment benefits for those who are rendered unemployed by the higher minimum wage.

Another way of thinking about it is this: With the EITC, jobs that do not create enough value for the employers to pay the employee the market wage are subsidized by the taxpayer. Therefore it is partially a circuitous way of making busywork for people. We might as well have them breaking rocks.