The Corner

Economy & Business

Re: Jobs, Wages, and the EITC

In response to More Polygamy

Ramesh: Thank you for your comments. I would like to respond to one thing you said. You write that even if the criticisms of the EITC that Chris and I develop in our paper hold, “Expanding the earned income tax credit poses much less danger to job creation than raising the minimum wage.” Unfortunately, it is this type of thinking that has resulted in conservative presidents and Congresses growing the size and scope of government rather than reducing it or reforming it. Is it the case that we must always choose between two bad options in the name that one is slightly less bad than other? I don’t think so. 

Our paper is an important reminder that in their haste to concede the Democrats’ claim that the government must do more for lower income people by giving them more money, conservatives are pushing for yet another expansion of a program that is less conducive to job creation than they claim and has much higher downsides and costs than they admit. As we show, conservatives pushing for an expansion of the EITC overstate the overall labor supply impact of the program (a large majority of people taking the EITC have an incentive to work less, not more), they overlook the EITC’s negative impact of the U.S. overall output and employment, they overlook the program’s budgetary cost ($60 billion in spending) and its large share of improper payments (the EITC error and fraud rate in 2014 was 27 percent, which amounted to $18 billion in overpayments). 

Now, I understand that it’s easier to offer to expand the EITC than to make the case for, for instance, a fundamental reform of the corporate income tax would have a significant and positive impact on workers’ wages since the tax can be shifted onto workers in the form of lower wages. However, political expediency or growing the government only slightly slower than Democrats rarely achieves better policies. And obviously, it does nothing to shrink the size of government under conservative regimes. 

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