Ezra Klein: Flattening the "U"

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February 02, 2007

Flattening the "U"

Thomas Freedman explains that an increase in the minimum wage should be coupled with an increase in the Earned Income Tax Credit. It will be interesting if, now that the minimum wage bill is passed, all the conservatives who've been talking up the EITC to head off the wage increase still agree that we need an EITC increase, or if that was but a ruse to head off help for low-wage workers. Anyway, we could get into some wonkery here about the wage and how the subsidies work and whether we can afford it, but in the end, this is a simple question of priorities:

Increasing the EITC for families with three or more children -- more than half of all poor children live in such families -- would help an estimated 3 million families and cost about $3 billion. Crucial actions such as improved outreach or removing a built-in marriage penalty could each be done for about $1 billion; more complete reforms that would also help those living barely above the poverty line could cost 10 times that or more.[...]

The federal budget is more than $2 trillion, and Congress's pork-barrel projects have been estimated at $47 billion. Home mortgage deductions -- a benefit for mostly middle-class Americans -- average about $9,500 a year per homeowner. By comparison, the cap on EITC payments last year was $4,400. The average EITC benefit in 2005 was only $1,872.

We have a U-shaped social welfare curve, where various tax breaks and subsidies that we don't call welfare (like the home mortgage and employer health benefit deductions) do the most for the middle and upper middle class, rather little (at least relatively) for the very rich, and very little for the poor. The question isn't whether we can change that. It's whether we want to.

February 2, 2007 | Permalink

Comments

Personally, I blame Economics. We treat a fake science like a real one, and it rots our moral fiber. Seriously, how honest do you think a grou pof people who are only concerned about "moral hazards" when the hazard is giving aid to the poor.

Posted by: soullite | Feb 2, 2007 8:33:29 AM

We should expand the EITC and cut back on middle and upper class welfare. I believe the deduction for home mortgages should be gradually phased out. There's no reason to subsidize the price of housing. After all, the Feds will let you deduct most or all of your payment. It doesn't make homes more affordable, it just inflates the cost and shifts part of the burden to the government. If the change were phased in over a 5 or 6 year period, the impact on current prices and individual's finances wouldn't be drastic. The tax increase could be mitigated by increasing the standard deduction per individual and enhancing the EITC.

Posted by: MarvyT | Feb 2, 2007 9:26:29 AM

You plot "subsidies that we don't call welfare", and claim that they are, in substance, welfare by calling it a welfare curve. Assuming that is true, then to flatten out your "U" curve, simply include all welfare on a welfare graph, not just the portion that you wish to plot.

Posted by: Fred Jones | Feb 2, 2007 9:38:37 AM

Fake, huh? It's true that most professional economists are conservative/libertarian. It's also true that economics is an idealized, limited, value-restricted perspective on the world. But nonetheless, the field is still all about having a rigorous and scientific framework in which to understand the entire basis on which our civilization is built. And that's kind of, you know, IMPORTANT.

About our "U-shaped social welfare curve," well, the Middle Class is by far the most powerful political, economic, and social constituency in America. This is probably more true in the U.S. than in any other country. Politically speaking, it would be a disaster to eliminate the home mortage deduction. I'm not exactly sure why it's a good thing on the merits, either. Unless you're talking about gigantic income redistribution, why does direct welfare for poor people have to come at the expense of the middle class? Raise the upper tax brackets by a couple percentage points, and there's your money for the EITC right there.

Meanwhiles, the best way to break the cycle of poverty come from things like improving the quality of education, access to college, universal health care, retooling the drug policy, investing in economic development, etc.--meaning things that don't involve direct redistribution, are good for everyone, but are most good for people with low income.

Of course it's harder to actually fix public education than it is to tax everyone and redistribute money. But the former is much more effective than the latter as a sustainable anti-poverty program.

Posted by: Korha | Feb 2, 2007 10:14:16 AM

As I've said before, I'm not a conservative, I'm a liberal (albeit of the classical kind). But since you ask, yes, the EITC should be increased and yes, various of the middle class welfare entitlements like the mortgage interest deduction should be reduced if not eliminated. As should the tax deduction for employer provided health care.
Also, the gas tax should rise, FICA should be abolished (fund SS etc out of general taxation: why have regressive taxes at all?), the income tax free allowance raised greatly: all farm aid abolished, both the corporate income tax (tax the dividends and capital gains the same as other individual income) and all corporate welfare abolished and how about only the rich (say, those on higher than median income) pay income taxes at all?
Anything else?

Posted by: Tim Worstall | Feb 2, 2007 10:14:26 AM

Yo--Rickey digs your blog. Check out Rickey's sometime and bookmark it. It's the balls:

http://ridingwithricky.blogspot.com/

Posted by: Rickey Henderson | Feb 2, 2007 10:40:36 AM

I don't disagree with his (or your) overall point, but I would like to point out he's using an apple-to-oranges comparison between the $9500 mortgage deduction and the $1872 EITC: namely that the first is a deduction, and the second is a tax credit. In terms of actual tax benefit, they're going to be a lot closer.

Posted by: Royko | Feb 2, 2007 11:31:47 AM

Hey, I'm more than ready for some real action to turn populism into a movement and not just a political term. This is the most basic and telling definition of populism: a language whose speakers conceive of ordinary people as a noble assemblage not bounded narrowly by class, view their elite opponents as self-serving and undemocratic, and seek to mobilize the former against the latter. [Michael Kazin: The Populist Persuasion]

(is the Ezra Klein online book club still in the oven, with Kazin's book as a leadoff?)

Bob Moser has a great article in the 2/17/07 issue of The Nation that has some major insight on how enhance the Democratic party's chance to reshape our dialogue and politics: The Way Down South: A populist route to Democratic revival. Both Edwards and Obama (and Jim Webb, too) have some parts of their campaign story that lead in this direction, but oh, too carefully, IMO.

Posted by: JimPortlandOR | Feb 2, 2007 11:57:41 AM

I still don't understand why people have to pay taxes on below poverty income, but that's just me. It's a lot easier to just make everyone pay a flat tax on all above-poverty income. To be revenue-neutral, I think this tax needs to be about 45%, at which level heads of families of four will see taxes go up if and only if they make more than about $81,000/year.

Posted by: Alon Levy | Feb 2, 2007 12:37:42 PM

It's a lot easier to just make everyone pay a flat tax on all above-poverty income.

Alon,

Let's all remember that the tax system has other funtions besides raising revenue. Being able to support socially desirable ends such as the earned income credit does with the poor allows government the ability to shower some industries with love and destroy others. Congress will never give up that power.

Posted by: Fred Jones | Feb 2, 2007 2:28:26 PM

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