To Play the Contrarian

One of the central things that virtually everyone agreed on in the economic discussion at TPMCafe last week was that the Earned Income Tax Credit (EITC) should be increased. The EITC is a popular idea among both Democrats and Republicans because it helps the working poor through something resembling a tax cut. It's also one of a handful of ideas that attempt to work with business and share responsibility rather than impose additional costs on business.

It's also, in some ways, a truly horrible idea.

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, a lesson we learn from history.

In the 18th century, England dabbled with an anti-poverty program known as the Speenhamland system. In this system, local governments subsidized wages of low-income workers in order to guarantee subsistence level incomes. The results were rather predictable. Families, no longer fearful of poverty (subsidies were tied to the cost of bread and the size of the worker's family), grew more quickly.

But something else happened. Workers saw their wages actually fall. A government promise to subsidize wages to the point of the poverty line removed much incentive for businesses to pay a damn thing.

Unfortunately, the EITC does the same thing to a less problematic extent. Since the 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.

More recently, some people have advocated for an expansion of the EITC system to include wage subsidies. Most notably, Matt Miller of the Center for American Progress argues in his The 2% Solution that wage subsidies are a great way to work with business to raise people out of poverty.

In reality, they're a great way to encourage lower wages by employees, higher costs on taxpayers, and laziness by employees. It's also what could be characterized as a standard "liberal" solution: throw money at the problem. The progressive solution of simply raising the minimum wage works far better and it really is where our focus needs to be right now.

Now, the EITC, fortunately, is not nearly as problematic as the Speenhamland system or as a direct wage subsidy would be, in large part because as a tax credit, it's a less visible subsidy to both the business and the workers it helps. As such, it probably doesn't distort the market as much.

Still, it's in my opinion a type of program that relies on the same economic principles that have failed repeatedly in the past.

--Matt Singer

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