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EITC vs MJ.ABW: Neo-Liberal Acronymic War

Cryptic enough? Well let me do some unpacking and straight out asserting and then turn this over to AB readers and commenters.

EITC is the Earned Income Tax Credit. Its open premise is that work should be rewarded. Its more hidden premise is that this reward should come as a premium over actual marginal labor productivity and so not come directly in the form of wages paid by the employer. Instead it becomes the obligation of society, or rather taxpayers as a whole. That is the promoters of EITC insist that the market works perfectly when assigning wages as a product of actual productivity but allow that the result is not socially equitable. I mean we can’t actually STARVE people even if the books suggest we should Amirite? After all we are good hearted Neo-Liberals.

EITC is often explicitly promoted as an alternative to increases in Minimum Wage. Which might provide the same or more reward or equity as EITC but are regarded as an economic distortion of actual market wages themselves set by some version of actual labor productivity. The problem here is two-fold. First it just concedes the underlying economic argument to the neo-liberal and classical liberals: that the Invisible Hand works when it comes to wage levels. The second problem is more pernicious. It comes into play when you realize that there is a lot of overlap between the ‘big-hearted’ economic liberals who allow that work should be rewarded even if those rewards are not specifically justified by the economics of the labor exchange and those who believe that taxation on corporations is both inefficient and inequitable. And who would make similar arguments about tax on capital in general. With results as seen in say the respective tax plans of Paul Ryan and Marco Rubio. The end result of this is that employers and capital in general propose to provide big ‘E’ Equity via EITC while shifting all responsibilities for its funding right onto labor share. Much as they propose to do with parallel proposals to shift taxes away from income to consumption. From this perspective all of EITC, and VAT, and FAIR Tax and Flat tax become a combined Acronymic War on labor by the controllers of capital.

In direct contrast to this jumble is the opposing acronym: MJ.ABW. More Jobs. At Better Wages. It too argues that work should be promoted and rewarded. But in the form of pre-tax wages rather than post-tax credits. And to those that would argue that this is just distortionary would simply reject the basic neo-liberal/classical assumption that wages are in practice set by some actual calculation of marginal labor productivity but instead recognize that they are and always have been by some combination of pure pricing power by employers mitigated only by residual wage market clearing power retained by workers. That is given any sort of labor market at all wages have to clear at or above subsistence, else people will just walk away. WHERE it clears above subsistence is some combination of actual labor supply and collective ability to demand higher wages. That is ultimately more of a purely political than economic calculation.

As such I consider most proposals to address inequity via EITC or UBI or tax credits to be potential Trojan Horses. Because in the end the actual equity depends on the actual incidence of the taxes that fund those benefits, income guarantees and credits. And all too often the promoters of such things as EITC propose to couple that with a shift away from taxes on profits and capital gains paid by the 1% to wage and consumption taxes paid by the 90%. With the 91-99% alternately rewarded and screwed as serves the interest of the real bosses.

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EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

by Linda Beale
EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

TaxProf today noted the article in the New York Times about the EITC: Casey Mulligan, Do Tax Credits Encourage Work? New York Times ( 2012). Mulligan, an econ prof at the University of Chicago (home, of course, to Milt Friedman’s “free” market theories) noted that the EITC “could” discourage work.

The earned-income tax credit is often said to encourage work, but it may do just the opposite. …
The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates [a] mountain-plateau pattern … an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.

… For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year. In other words, for households on the downward-sloping portion of the earned-income tax credit schedule, the credit acts as an extra 20% tax on the income they earn in that range. The work-encouraging potential of the credit occurs only on the upward-sloping portion. … [emphasis added]

Now, Mulligan surely knows that this theory about whether the credit encourages or discourages work is just that–a theory. Much of the assumptions about when people will stop working and substitute leisure don’t seem to hold up in practice, partly because there are so many other factors at work besides the rather simplistic assumptions in freshwater economics (such as the joy of working, status of work, self-esteem of work, etc.). Nonetheless, Mulligan can’t help adding another line that makes the overall comment suggest that he thinks the EITC will on the whole discourage work.
[I]t is more common for families to be on the part of the earned-income tax credit where it acts as a tax, rather than a reward to additional work.

Of course, when economists talk, policy makers often listen. This is a good example of when they should say–huh? and get a second opinion. What we should care about as a tax policy matter–which, I remind you, is distinct from what we might care about purely as a question of economic “efficiency”–is whether the EITC will generally work to encourage those who otherwise have tended to be left out of the work force but should be in it and whether the potential negative effect at the drop-off would be likely to be genuinely detrimental to that group or rather impact groups for whom the difference may not matter so much.
Ted Seto, a fellow tax prof in sunny California, commented on the Tax Prof item to point out the important empirical evidence that the EITC is mostly working as we want it to.
For a useful summary of recent empirical work, see Nada Eissa & Hilary W. Hoynes, Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, published in 2006 by NBER…

“The overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers. There is little evidence, however, that the EITC has reduced the hours worked by those already in the labor force. The empirical literature on married women is somewhat smaller but again consistent in its findings. The studies show that the EITC leads to modest reductions in the employment and hours worked of married women.”

The latter problem — the one area identified in which the EITC does seem to have a negative effect on paid work — is not an EITC problem at all. It’s the same secondary worker problem Ed McCaffery has written about, (Taxation and the Family: A Fresh Look at Behavioral Gender Bias in the Code, 41 UCLA LAW REVIEW 983 (1993)), and it affects secondary workers up and down the income range.

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