Warren Buffet: Fighting Income Inequality with the EITC

Warren Buffet’s article in the Wall Street Journal reminds me of some posts I wrote a while back on fighting income inequality. His article contains a lot of wisdom. Some excerpts:

The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.

He writes that an expansion of the minimum wage to 15 dollars per hour

would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty. […]  The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC).

I agree entirely and so would Milton Friedman.

Unlike the minimum wage which draws money from an abstract group of individuals some of whom are not high income earners, the EITC draws funds from the broad U.S. tax base which in turn draws more heavily from upper income individuals. Unlike the minimum wage, the EITC can be directed at low income households rather than low wage individuals — many of whom are simply teenagers working summer jobs. Unlike the minimum wage which discouraged employment, the EITC encourages employment.

Buffet also proposes some common sense modifications to the EITC which I would welcome. In addition to reducing fraud, …

There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through.

The main problems with such an expansion of the EITC are political. Taking a serious swing at reducing income inequality would require a lot of money. Republican’s will likely oppose it because it is “socialist” or some nonsense. I’m sure that many Democrats would be very receptive to an aggressive expansion like Buffet alludes to but the cost in political capital might be too great for a politician to pay.

.

Advertisements

8 thoughts on “Warren Buffet: Fighting Income Inequality with the EITC

  1. “Unlike the minimum wage which draws money from an abstract group of individuals some of whom are not high income earners, the EITC draws funds from the broad U.S. tax base which in turn draws more heavily from upper income individuals”

    Your supposedly abstract group is actually quite concrete. For example in the case of Walmart the Waltons would lose and hundreds of thousands or millions of their empolyees would gain. They won’t fire anybody, they would simply harvest less capital gains.
    Given that the capital income / GDP has risen significantly during the last decades it should be obvious that a classical wage equals marginial productivity model is far less appropriate than a bargaining/ rent distribution model. Not to mention that due to efficiency wages a rise of the minimum wage has negligible effects upon employment. Anybody economist who actually reads EMPIRICAL papers and doesn’t just spout out theory/ideology is aware of the latter.

    • I’m not sure if you are trying to be sarcastic. To the extent that you believe your own comment you are assuming that the minimum wage will be paid entirely by a subset of the owners of the corporation. (This makes zero sense). The assumption that the wage will be paid entirely by the corporate owners is false but even if it were true (and it isn’t) at least half of the owners of Walmart are simply investors who hold Walmart stock — these are retirees, pension funds, mutual funds, … For other minimum wage employers the discrepancy will be even greater. Even in this extreme case we have very limited control over who is paying for the wage increase.

  2. Good article, however if the minimum wage is overly low there can be scope for increases with very little effect on employment. There is little point in having high employment if wages are still too low to have decent living standards.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s