Friday, November 14, 2014

Every Story Has Two Sides (Earned Income Tax Credit Edition)

America's favorite welfare policy is the Earned Income Tax Credit (commonly referred to as the EITC). I can't verify this, but I'm sure a good poll would back up the assertion. The basics of the credit are that low-income earners receive additional money from the government to match wages on a sliding scale. The lower your income, the greater the match (if you're interested yet unfamiliar, the left-leaning Tax Policy Center breaks it down here). The larger question is if this policy is more important to poor people, or corporations.

That seems to be a weird question at first blush - why would a welfare program that costs money (and therefore requires higher taxes) be such a benefit to McDonald's? After all, the primary reason Republicans and Democrats get behind it is that it incentivizes work (you're not eligible for the matching credit if you're not earning wages to match) and the lowest earners get the biggest benefit by ratio (the most goes to those who are the most in need).

But the part that makes the tax credit great is the part that makes it the biggest corporate giveaway. Minimum wage earners are more satisfied with their low wages if the government provides a bit of extra cheddar to supplement income. Remove this subsidy, and earners will either pursue more leisure (following our Econ 102 work/leisure charts) or demand higher wages. And while workers eligible for the EITC have very low bargaining power, the fact remains that money is money. As long as a worker earns X, they're willing to provide Y amount of labor. Take away this government policy (X becomes X - EITC), and Y goes down correspondingly.

Following this line, the government is paying to subsidize willingness to work. Without the EITC, companies would be forced to pay higher wages to receive the same work. In times of high unemployment like 2008 this wouldn't be a concern, but in 2014 unemployment is dropping like a piece of paper (slowly but surely, while floating back and forth in an unpredictable pattern). People are happy working now, but maybe a minimum wage isn't enough in a world without this corporate subsidy. At least when there is greater demand for labor.

None of this is to suggest the EITC is a big corporate giveaway that should be scrapped - indeed, it serves a valuable purpose for people in need. And I'm not singling out big corporations - the small business owner with two low-wage employers struggling to stay open benefits just the same as Subway does. To characterize it as a corporate subsidy is misleading as it's more of an employer subsidy. But it's safe to assume the fast food industry is a lobbyist for the credit; I'm sure that makes for interesting bedfellows.

Every story has two sides.