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Tying together two forms of crackpottery

A Bush-apologist economist I occasionally read keeps talking about how the EITC is more effective than the minimum wage at providing incentives for the very poor to work. I just added the following comment:

You misunderstand the point.

Group A advocates that we increase the minimum wage. They're serious. They're really trying to do it.

Group B says "that's stupid; just raise the EITC instead". They're not serious. They have no intention of raising the EITC.

Group B, when in power, did and continues to do nothing to raise the EITC. Hence, disingenuous.

Even if raising the EITC worked as well as its proponents claim, today, it's just a stalking horse, because its proponents have no intention at all of doing it.

Parallels abound. For instance, in most cities planning light-rail lines, you always end up with a group pushing for fully elevated transit - and if you dig hard enough you find that the guys who don't want any transit at all form about half of that group.

It's not just Austin where this happens, but of course, Austin is where we live. I'd say about half of the impetus behind the "build elevated transit, not grade-level transit" (whether grade-level is bad streetcar, good light-rail, or mediocre commuter-rail) comes from road warriors who find the naive but well-meaning monorail crew useful cover. Not to say that there aren't people on the monorail side who really believe it's what we need - my former colleague Patrick Goetz is certainly one of them - but whenever discussions come up of the "why would we build rail on the ground?" type, you can always dig a bit deeper and find some guys who really don't want any rail transit at all.

This entry was posted in the following categories: Economics , Republicans Hate Public Transportation , Transit in Austin , Transportation

Comments

Somewhat similar to one of the two major political parties quietly funding a spoiler third-party candidate who will draw votes from the other major party.

The thing is this guy's argument is wrong even in the abstract. He writes "A better weapon to fight poverty is the Earned Income Tax Credit, a provision of the income tax system that supplements the income of low-wage workers."
Only it doesn't "supplement" your wage. It refunds more of what the government took *out* of your wages. Even though it is a "refundable" credit in the sense you can pontentially have zero-income tax liability and then get a check for your EITC, you are just getting back some of your OTHER payroll taxes at that point (e.g., social security).

Of course, the fact that professor at Harvard can get this wrong shows how tedious our tax system is.
Could be worse, though. If an MIT professor was getting it wrong, we'd really be up the creek. It's not like you can count on harvard profs to get too many things right.

I don't think that's right, DSK. It's a tax credit, which means it not only offsets your tax, but you get a refund if it exceeds amount withheld. I.e., IRS treats it like money you've paid the government.

I guess someone should look this up . . .


re-reading my last comment, it reads sarcastic, but i didn't mean it to -- that's how I've always understood the EITC, but i've never read the IRS regs or EITC publication or anything like that. That'd be authoritative.

A married couple with two kids each working full time at minimum wage will make $22,256. Applying the standard deduction ($10,000) and four exemptions at $3,200 each, their tax liability is $0. (actually -$546.) They get a $2,735 EITC, plus two $1,000 child tax credits (I think it's cumulative with EITC).

So they ought to get $4,735 back from the government, plus whatever was withheld in income tax withholding.

that's not a lot, I know (effectively a 20% raise), but I'm one of those who believes it makes more sense to increase the $4,735 than to arbitrarily raise the hourly raise. There's nothing to keep us from doing that.

There was a big push earlier this year to get a minimum wage increase through Congress this year. It had a some Republic support, but I guess not enough. I suppose it's easier for Democrats to push the minimum wage rather than the EITC because the EITC is so wonky -- who understands it?

I'm an agnostic on the minimum wage. Despite studies showing no such effect, 80% of economists appear to view it as gospel that it forces unemployment of adults. But to me, it's just as possible raising it can return some discouraged adult workers at the expense of teenage labor which we'd all be better off without anyways.

IE, more incentive for adults to take these jobs (some weren't working because it wasn't worth X but is worth Y), plus, you get more high school kids spending their time on school instead of flipping burgers, which, I'm sorry, doesn't teach you _anything_ useful these days.

AC, you are missing one crucial part. I'll just repeat myself:
Even though it is a "refundable" credit in the sense you can pontentially have zero-income tax liability and then get a check for your EITC, you are just getting back some of your OTHER payroll taxes at that point (e.g., social security).

In other words, when you say "you get a refund if it exceeds amount withheld. I.e., IRS treats it like money you've paid the government," that's exactly right. But that's because it IS money the worker paid the government. Just not for INCOME tax, but for other federal taxes: social security & medicare. THAT is where that $2,700 and change is coming from - the other federal taxes the worker paid. I'm being picky about this because the manner in which the EITC is a refundable credit is often denounced by some types as some kind of welfare handout, when it's really not, it's still just a refund of money the worker actually earned himself. And the amounts you get back per-earned income are very much fomulated with those other federal payroll taxes in mind.

Now, the child credits are another story altogether...

Anyway, in answer to your question "who understands it?"... apparently only me. =)
Of course, now watch me be wrong about something.

Well, this is a big point. I agree that the EITC isn't worth anything if it's just refunding taxes paid into the system, and if you're right, it'll affect my support for it (as an alternative to the mw, at least). DSK, if you've got authority for your statement, please cite it. (If you're a professional tax preparer or someone else who'd just know that, just cite yourself.) I'll look a little on my own tonight.

But it seems odd to me that the IRS lists a $2,756 EITC credit for my hypothetical married couple with two children when there is no mathematical possibility that they will owe that much in taxes (even counting their social security taxes, which come to just $1,700 or so.) But no one said the government has to be logical, so that's not proof.

M1EK, I'm agnostic about how much harm the minimum wage does. Economic theory predicts it will hurt employment, but the empirical evidence for that is pretty slim. (See Steve Landesburg's column at http://www.slate.com/id/2103486/ - I recommend his book "The Armchair Economist")

I just don't know how much good it does.

"Local" minimum wages tend not to be binding -- i.e., they're enacted in jurisdictions where the prevailing minimum is above the legal minimum. (oversimplification, but bottom-rung wages are a lot higher in say Illinois than in Mississippi)

National minimum wage benefits poor people in states like Mississippi -- where a high percentage works at minimum wage -- more than in states like California, for the same reason.

Finally, raising minimum wage doesn't necessarily benefit people who were already making the new amount, or might not benefit them much. Maybe wages go up, maybe they don't. The EITC (unless I'm all wrong about it) benefits even people making a lot (relatively) more than mw.

Follow up:

On the 1040 form, the child tax credit is listed -- not suprisingly -- in the tax credit section. The significance of this is that if your tax credits exceed tax owed, you just enter "0"

The EITC is under "payments." That is, it's treated just like taxes withheld. You add 'em together, deduct your taxes owed, and then put down that amount as the amount of refund. There's no place to figure in some kind of limitation based on amount of tax owed. (Nor is there any place to do that on the EITC worksheet.)

So as I read the 1040, you don't get the child tax credit if your tax liability is 0, but you still get the EITC.

That said, $2,700 works out to only a 12% boost in pay for full-time minimum wage workers, or just 60 cents an hour. Looks like you'd have to double or triple EITC to provide real help.

Whoa now, I'm not saying the EITC isn't worth anything - not sure where you got that from. Quite the opposite, I think it's worth quite a lot, which is why I am trying to make clear it's not a handout, but a hand up, because it is just letting low wage workers keep more of the money they earned.

AC, you write "But it seems odd to me that the IRS lists a $2,756 EITC credit for my hypothetical married couple with two children when there is no mathematical possibility that they will owe that much in taxes (even counting their social security taxes, which come to just $1,700 or so.)"

It's more than that. Remember Medicare and the 1/2 of the social security tax that is "hidden" from W-2 workers (but not 1099). In total it comes to 15.3%.

This is a straw man. People do intend to increase the EITC, and they are. From wikipedia:

Enacted in 1975, the then very small EITC was expanded in 1986, 1990, 1993, and 2001 with each major tax bill, regardless of whether the tax bill in general raised taxes (1990), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States.

Dan,

Yes, but the same folks largely in favor of increasing the minimum wage are the ones who pushed for the EITC to be increased. Mankiw, on the other hand, primarily functions as an apologist for corporatist Republicans who have never seriously tried to raise the EITC, and in fact, would likely oppose it if it were seriously attempted again.

But why would anyone push for both? The minimum wage targets the wrong people (it’s mostly a transfer to middle class teenagers and college students), and even if it were means tested, it would hurt the people who need help the most. If you’re an employer, and the cost of labor goes up, who are you going to get rid of? The people who are the least productive i.e. the people who are most likely to be poor.* And even if it transferred money to the people who need it most, it would still be inefficient compared to a negative income tax. It makes more sense to ignore the minimum wage and push for a larger increase in the EITC.

How do you know what Mankiw thinks? From his blog posts, I get the impression that he wants the EITC increased, but I haven’t been reading him for too long. Is there a post where he comes out against transfer payments to the poor?

All of the big increases to the EITC have happened under Republican administrations, and Clinton – a DLC democrat who was as centrist as they come.

I’m typing an awful lot for a blog comment. When you get down to it, my real objection is that I don’t like the analogy because monorail isn’t obviously better than commuter rail or light rail, but a negative income tax is obviously more economically efficient than the minimum wage. Haven’t you argued against commuter rail because light rail is so much better?

*Around the blogosphere, I’ve seen reference to a study showing that the minimum wage doesn’t have a significant impact on unemployment, but that same study says that it doesn’t have a significant impact on poverty either.

And regarding the debate between DSK and AC, in 2003, only 12% of the EITC went to offset taxes owed; the other 88% was a straight refund.

Those EITC hikes, I recall, happened in spite of, not because of, Republicans. I've certainly never seen them suggested by Republican leaders in isolation, or for that matter, seriously.

Mankiw's disingenuousness on this matter is fairly easy to see if you read the rest of his blog, which pretty much follows the standard post-Reagan line (deficits don't matter; cut taxes on the rich even more; etc.)

"And regarding the debate between DSK and AC, in 2003, only 12% of the EITC went to offset taxes owed; the other 88% was a straight refund."

Dan,
Again, you are forgetting about the other federal payroll taxes beyond the income tax. That 88% of $$ beyond the income tax liability is going to refund those OTHER federal taxes.

Mike,

Maybe. I haven't followed his blog, or politics, for long enough to know the answer to either question, so I'll take your word for it.

DSK,

Really? It's been a while since I read up on this, but I'm sure the statistic I'm thinking of is coming from an IRS report, and I would expect them to adjust for that. I admit that I didn't check, but how can you be so sure? And either way, those taxes are orthogonal to the EITC (and other credits like the CTC), so there's no reason any person's EITC refund couldn't exceed their other taxes paid.

"And either way, those taxes are orthogonal to the EITC (and other credits like the CTC), so there's no reason any person's EITC refund couldn't exceed their other taxes paid."

I disagree: those taxes are not orthogonal to the EITC. Remember it's the *earned* income credit. Basically:
A) it's extremely difficult to qualify at all (even if your AGI is very low) for the EITC if you have more than a modicum of income from non-employment-based (i.e., "unearned") sources
B) even if you do possibly qualify, you must then use a series of complicated calculations/worksheets to exclude various bits of whatever "unearned" income you have from the number that you eventually use to figure your credit. this all has the effect/result of only giving you money back for "earned" income and thus not giving you a credit employment taxes (social security, medicare) that you never paid

that should read: "a credit FOR employment taxes (social security, medicare) that you never paid"