When it comes to helping the working poor in America, Warren Buffett has an idea that he believes is better than raising the minimum wage. And there are some good reasons to like not only his idea but also the way he presented it.
With some issues a calm, analytic presentation is especially welcome. We’ve reached the point in discussing income inequality, for example, where even just the mention of the subject puts both sides on auto-response. Instead of examining the issue carefully they feel threatened, reach for the alarm bell and shout, “All hands on deck. Prepare to repel boarders.”
Buffett begins by describing our income imbalance issue simply: “In recent decades, our country’s rising tide has not lifted the boats of the poor.” And he follows this with, “No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich.”
Having taken away the shouting and the verbal weaponry that usually punctuate discussions of income distribution, he brings out his idea: Use a cleaned-up and turbocharged version of the Earned Income Tax Credit (EITC) to raise the incomes of the working poor.
Is it a good idea? It certainly has some good aspects to it, perhaps the greatest of which appeared in the title he gave to his essay: “It’s Better than Raising the Minimum Wage.” There are a number of reasons why raising the mandated minimum wage to a level that would make a significant difference is a bad idea, one of which he mentions himself. In his judgment, it “…will reduce employment in a major way, crushing many workers possessing only basic skills.”
Buffet’s EITC plan would leave the wage setting to the market, but would further the American Dream by rewarding those who are working by transferring money from those who earn more to those who earn less.
If we accept that idea because it would be good for America — and, to be sure, not everyone does — we still have to confront some obstacles that could keep the idea from working out as planned.
The first is money. Are those in America’s upper income levels willing to pay a tax in order to subsidize unskilled labor? And the answer is that they might be if the idea is presented effectively as being good for America and the economy and if they trust the government to manage the money effectively to deliver the promised results.
Trust in the federal government’s ability to manage anything is in critically short supply these days and this could be a major obstacle for Buffett’s idea. And it is particularly unfortunate that the EITC is the fulcrum for the concept even though, from an efficiency standpoint, it is the obvious choice.
Of all the areas within the tax code, the EITC is the clear champion when it comes to fraudulent returns, and the IRS has seemed incapable of getting it under control.
The structural reason behind the EITC fraud problem is that a tax credit, unlike a tax deduction, is treated as if you had made a payment toward your tax. If your total calculated tax is lower than what you paid, you can get a cash refund. To crooks, cash refunds are like the cooling roast turkey was to the next-door neighbors’ dogs in the movie, “A Christmas Story” — an irresistible temptation.
The difficulties that the IRS has in getting the EITC and related fraud under control are just part of the federal government’s management issues, but it brings us back to Buffett’s original thought — it’s better than raising the minimum wage. What we’ve got there is the worst of both worlds; a defective idea being launched mostly by city governments whose money management skills make the federal government look like experts.
Superimposed upon the financial and management problems attached to Buffet’s idea, there is also a fundamental political problem: it lacks a constituency. No immediately identifiable power group is going to get behind this idea and back it in Congress. It is neither impossible nor unprecedented for this kind of an idea to succeed but it does make things more difficult.
There are things to like in Buffett’s idea. Still, even if the government’s management faults could be remedied there is another aspect that should be considered. The problem may be temporary but the solution is permanent. This idea will not simply further the American Dream; it will become a permanent part of it…and change it to include the government.
Subsiding work and effort is an idea worth looking into, but maybe the government already has enough responsibilities it should take care of before it starts altering our dreams.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.