On the Incidence of the Earned Income Tax Credit
Max Sawicky takes on this comment from Michael Lind:
Why do right-wing Republicans, and conservative Southern Democrats like Lloyd Bentsen, love the EITC? Because it is a taxpayer subsidy to employers which enables them to pay below-poverty wages to their workers. In other words, the EITC is corporate welfare, a massive redistribution of wealth to the very employers that treat their workers the worst.
More from Michael Lind:
The greatest challenge to the formation of a powerful liberal-centrist bloc in favor of a living wage is the seductive alternative of the earned income tax credit (EITC). Many moderates view it not as a supplement to high wages but as a substitute for them … It is unlikely that the EITC would have received the enthusiastic support of many pro-business conservatives and moderates, however, if it did not disguise a business subsidy … The EITC permits them to do something for low-wage workers without threatening their donors in industries that rely on cheap labor. In effect, it is a double subsidy. By aiding the worker the EITC enables the employer to continue paying far less than is needed to survive at or above the Federal poverty line. The Southern cotton mill owner pays his workers a pittance—and you and I, fellow taxpayers, cough up an additional “social wage,” the EITC. The consumer, who otherwise would have to forgo the good or service or pay more for it, also benefits. Make that a triple subsidy. In addition, the EITC is probably an interregional corporate welfare program. To my knowledge nobody has studied the issue, but it is a fair guess that the South, with the lowest wages, the lowest levels of employment benefits, and the lowest rate of unionization in the United States, receives a disproportionate share of Federal EITC money.
OK, Lind goes too far – but EITC is a subsidy as noted by Jared Bernstein, who noted:
The EITC is clearly raising the living standards of low-income working families. Furthermore, the fact that it is tied to work has largely insulated it from partisan attack and has even allowed for its expansion in this era when social welfare spending is so highly scrutinized. Yet the EITC is not perfect. Some of its benefits surely end up subsidizing employers, who would likely have to raise their wage offers in the absence of the program. More important (since this wage effect is probably small), relying solely on tax policy to raise the incomes of low-wage workers is a serious mistake. We also need policies that focus directly on raising pretax wages. Otherwise, we face the likelihood of a perpetually expanding low-end labor market, with jobs that fail to pay a living wage and thus require ever-increasing taxpayer subsidy.
It would be interesting to analyze the economics of the policies that would “focus directly on raising pretax wages” in addition to discussing the incidence of the EITC. Since Lind concedes that some of the incidence of the EITC accrues to workers, let’s also concede that some of the incidence of this subsidy accrues to workers. However, if the elasticity of labor supply is smaller than the elasticity of labor demand, then most of the incidence of the subsidy accrues to workers – not employers.
Bernstein also notes:
In 1997 the IRS paid out $30.6 billion in EITC claims to about 18.5 million persons. That’s up from $6.6 billion in 1989 and $1.3 billion in 1975 (in nominal dollars). And we’ve gotten a lot for the money. As the Center on Budget and Policy Priorities has shown, in 1998 the EITC was responsible for lifting nearly 5 million persons out of poverty … We have a low-wage labor market problem in this country, and the EITC is an essential part of the solution. But it cannot be the sole solution. Unless we rely on other strategies for improving pretax earnings in the low-wage sector, the living standards of low-income families will be largely dependent on the tax system.
If Bernstein is saying that we should supplement the EITC with other policies designed to lift low wage workers out of poverty, I agree and I suspect Max and Michael Lind do as well.
Update: A Max reader alerts us to The Mid-1990s EITC Expansion: Aggregate Labor Supply Effects and Economic Incidence by Jesse Rothstein.