Who Does Warren Buffet Speak For?

Who Does Warren Buffet Speak For?

Recently Warren Buffet took to the pages of The Wall Street Journal and suggested that a better way to help the poor would be through the Earned Income Tax Credit (EITC); not an increase in the minimum wage. And yet, this is the same Warren Buffet who argues that tax rates for the wealthy should be increased because it is unfair that he as a multi-billionaire should be paying the same effective tax rates as his secretary. Is this a contradiction?

Arguably the higher taxes that Buffet wants the wealthy to pay could perhaps be used to fund the EITC or its expansion. And yet, this version of progressivism is riddled with the type of hypocrisy that fuels what I referred to a few weeks ago as the New Welfare State-Service Sector Complex.

The EITC, on the books since 1975, has effectively become a negative income tax for those earning around the minimum wage. In 2014, a family with one qualifying child would get a maximum credit of $3,305 while somebody with no qualifying children would get a credit of $496. One with two children the credit received $5,460, and with three children it was $6,143.

A family gets the maximum credit if the earned income is between the minimum wage and some percentage above that. The effect of an EITC for say a single mother with three children earning the federal minimum wage is to have an income of $21,223, of which 28.9 percent is being paid by the government. As one’s income moves up the scale the EITC then begins to phase out. The same single mother with three children would be eligible for an EITC until her income reaches $46,997, and $52, 427 if she were married and filing jointly.

Conservatives love this because it effectively rewards work without forcing employers to pay higher wages which they claim will have employment consequences for low-wage workers, especially those lacking in skills. But conservatives are the first to scream moral hazard when social programs are expanded. Public assistance, they claim, diminishes the incentive for workers to work and unemployment insurance results in unemployed workers being slow to search for new jobs.

Moral hazard, however, cuts the other way too. With the EITC employers have no real incentive to pay their workers more because they know that their employees are effectively being subsidized by government. Meanwhile, employers like Walmart are known to help their workers sign up for the EITC. As for the progressivism of the wealthy paying higher tax rates? Buffet surely knows that very few will actually pay more in taxes because they can take advantage of enough tax deductions and loopholes to avoid paying their taxes.

What about the bromide that low-wage workers aren’t worth more than the minimum wages they are currently getting, and to be required to pay them more is to spend more money without getting any real value in return? Here critics may actually have a point, but not for the reasons they typically claim. Their claim is that they simply lack skills or a level of education that would justify paying them a higher wage.

Recall the efficiency argument that a minimum wage is really about getting workers to invest more of their effort into their jobs and thus increasing productivity. But what incentive does a low wage worker earning the minimum wage have to put more effort in for the employer if a good 40 percent of that person’s wages are coming from the government? Are they really not worth higher wages, or is it simply a nice rationalization of an existing status quo predicated on low wages that are effectively subsidized by taxpayers?

When Warren Buffet talks about the EITC being preferable to the minimum wage, he is effectively saying that a low-wage strategy bolstered by public subsidies is really a sound economic policy. In other words, paying low wages is perfectly fine because low-wage workers can make up the difference through public subsidies. And because the wealthy, even with higher tax rates, will nonetheless find ways to evade paying taxes, the burden of paying these subsidies will fall on the middle class.

This ought to give us pause. Why should we want a low-wage economy? Shouldn’t the ideal be a high wage economy? The standard economic model that claims that there are disemployment effects to an increase in the minimum wage, and more so for the poor who are disproportionately low-skilled workers, also maintains the Buffet argument to be the epitome of rationality. But wouldn’t it be more rational to pay workers enough that they don’t need these subsidies and then reduce these subsidies and the taxes that support them accordingly?

The real fallacy in Buffet’s argument is the assumption that the minimum wage is really about the poor. The minimum wage is really about labor-management relations and ultimately shoring up the middle class. As I have said in this space many times before, those earning the statutory minimum wage is not as important as those earning around the minimum wage. If the minimum wage is a reference point for the larger low-wage labor market, then the effects of an increase are considerably larger.

The Congressional Budget Office acknowledged as much last year when it said that even if 500,000 jobs were potentially lost due to an increase in the minimum wage to $10.10 an hour, the economy as a whole would still be better off. More than 16 million workers would see their pay go up and their higher wages would enable them to spend more in the economy, which over time would result in growth. The 16 million who would earn more is obviously more than those who earn the statutory minimum wage, and includes those earning in wage ranges above who would see their wages rise too.

All this brings us back to Buffet’s apparent contradiction between higher tax rates for the wealthy and a preference for the EITC over the minimum wage. Or is it really a contradiction? Perhaps the real question is just whose interests does Warren Buffet speak for? Certainly not the low-wage worker, and probably not even the middle class. He represents the interests of corporate America that enjoys higher profits through the payment of low wages that are effectively subsidized by the American taxpayer. A preference for the EITC merely speaks to the rising social costs imposed by low-wage employers.