Arnold Kling  

Income Redistribution Proposals

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The Chronicle of Higher Education discusses a number of income redistribution proposals. For example, Edmund Phelps has suggested a government wage subsidy for low-wage workers.


Mr. Phelps argues that his plan -- which, in his view, should entirely replace the welfare and food-stamp programs -- would draw hundreds of thousands of discouraged workers into the labor market. In turn, he says, that would reduce the cycle of self-destruction that afflicts many poor neighborhoods. He predicts that violent crime and prison costs would substantially decline.

For Discussion. How does this idea differ from the Earned Income Tax Credit?


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CATEGORIES: Income Distribution



COMMENTS (17 to date)
Eric Krieg writes:

First of all, why is this in the Chronicle of Higher Education?

Second of all, I hate to keep harping on immigration, but WHAT ABOUT IMMIGRATION!?!?!

"Low wage workers" are largely immigrants. US born low wage workers are competing with immigrants for the limited number of low wage jobs.

If you did SOMETHING to lessen the number of illegal immigrants working in this country, you would improve the lot of native born low wage workers.

Boonton writes:

That sounds like the 'lump of work' fallacy which lead France to put in a 30 (or 35?) hour work week on the idea that it would make employers give some of the jobs to the unemployed.

David Thomson writes:

“Mr. van Parijs replies that the liberal principle of neutrality among conceptions of the good life, as articulated by such philosophers as Ronald Dworkin and the late John Rawls, demands that the state not favor the industrious (the "crazy," as Mr. van Parijs facetiously calls them) over the lazy.”

Oh my God, I have to hold back the urge to vomit. I have long argued that John Rawls did enormous damage. It is sickening to see his philosophical silliness employed to justify a nonjudgmental attitude towards those who work and those who arbitrarily choose not to. No society can survive if it fails to make prudential judgments concerning human behavior. God may have the ultimate judgment, but we on this side of the grave must do our best to ascertain who earns our respect---and who deserves to be rebuked. John Rawls was an unwitting nihilist.

Eric Krieg writes:

I don't quite understand how a reverse tax or EITC is being neutral towards the lazy. It is redistributing income from the productive to the lazy.

Eric Krieg writes:

Ok, lazy was a bad word. How about "from more productive to less productive".

Boonton writes:

Low paid is not quite the same thing as lazy. Likewise high pay is not always the opposite.

Xavier writes:

"I don't quite understand how a reverse tax or EITC is being neutral towards the lazy. It is redistributing income from the productive to the lazy."

That is the basic difference between socialists and capitalists. To capitalists, the state of nature is having all resources owned by the person who produces them. To socialists, the state of nature is having all resources equally distriubted. It is only a government sponsored regime of property rights that allows some to acquire more than others.

Dave Sheridan writes:

If the goal is to assure that those who work full-time are able to maintain a (somehow defined) minimal living standard, then the EITC seems to me to be the most efficient and equitable subsidy. For one thing, it does not subsidize low-wage workers who have other sources of income. The EITC has a further benefit of minimal distortion of supply and demand for labor. It should also be possible for this kind of subsidy to be tailored to minimize the dependency traps inherent in moving from welfare to work.

The van Parjis model rewards leisure and other non-productive activities. To see the ruinous social cost of this kind of subsidy, one need only look at the labor force participation rates in European countries with generous and long-term unemployment benefits. Michael Lewis' comments about the minimal likely effects on labor supply appear to be wishful thinking, when one looks at the evidence. Don't get me started on Rawls and Dworkin.

Lawrance George Lux writes:

The basic cause of Unemployment and Low Wages lie with the manner of funding American education and training. American business should be made to bear the cost of Education, not Parents or society. This can be done with an Education tax on Wage labor--paid by Business.

All of the Proposals offered insist on a bureaucratic nightmare of Accounting procedures, for very little benefit for Worker, Administrator, or Society. They would only raise Business costs, Taxes, and lower longe-range productivity.

My basic Proposal is initiation of a Law standardizing the Workweek to 32 hours, with exhorted Double-time pay for all Overtime. Business would be compelled over Time to train labor effectively, while vastly increasing employed labor. Boonton criticized the French model, which was only a half-measure; an effective law must make Business pay the labor cost in any case, the rationale for the Double-time pay.

Real results of the Proposal:
1) increase in Labor rolls and Payrolls.
2) an increase of Business labor training by a factor of 3.1, American labor-training costs currently being among the lowest in the World for the Employers.
3) A end-result gradual redistribution of Income with the Average and Mean closing the Gap.
4) It will increase Business labor costs, until they have introduced effective labor-training programs, which will hire Workers, and cushion decreases in excess Incomes. lgl

Boonton writes:
The basic cause of Unemployment and Low Wages lie with the manner of funding American education and training.

What evidence is there of this? Unemployment is clearly cyclical so how is it caused by either the education system or its method of funding? The mandated 32 hour work week, IMO, is the 'lump of work' fallacy. It assumes there is some fixed amount of work(tm) so unemployment will exist if 90% of the workers get work at 40 hours a week or no unemployment will exist if 100% work 32 hours a week.

This is simply wrong. The mandated work week punishs those who would choose additional work hours over leisure. Why they would choose this is their business. Sometimes when my personal life was bad I found a refuge in working extra hours. Some people really do love their work. By prohibiting such people from choosing additional work you are only robbing the economy of additional goods and services. You aren't freeing up a part-time job for some unemployed person.

Ron Ledbury writes:

The earned-income tax credit is a tiny little thing that is likely fully matched by reduced government expenditures to aid kids, most likely at the state level with federal pass-through dollars.

The wage subsidy is a partial offset to the economic rent imposed by price support schemes. Nearly every proposal to help the poor has both the nominal beneficiary, the poor, and the real beneficiary. Low interest rates on homes boost the appraisal value of nearby homes while giving the poor the fleeting right of occupancy. Drugs for some keep the cash flowing to the drug makers and blunt the negative effect upon the poor of pricing to maximize revenue.

The economic rent, from an individual perspective, is not linear to income. It is more like a base amount that we all must face, working or not, just for the food shelter and medical care, and then from there it scales up with spending. The wage subsidy preserves the economic rent but tries to hold the working poor, and their employer, harmless to the economic rent. It still remains economic rent regardless of who pays.

Tolerance of anti-competitive pricing of goods is no less vile than the poor slob on public assistance. The government, through arguably redistributive measures, cannot come close to compensating for the net loss caused by economic rent. The working poor through either the earned income tax credit or the people who would receive a wage subsidy (both business and labor) would not accumulate wealth. The middle class continues to also pay the economic rent and likewise bear the burden of paying the subsidies for which they themselves do not benefit.

A simple concept that applies in less-industrialized-countries when converting from an agrarian society is that cheap food translates to cheap labor. Cheap housing, food and medical costs, translates to cheaper labor in the US too. Yet, the tax code rewards asset inflation, nearly tax free, and all help to the poor is premised upon price support schemes in disguise. It is no surprise that businesses cannot afford to pay a living wage amongst all the price supports. A government wage subsidy, as a general remedy, is absurd.

It is as if people who took basic economics took it as clue to modify laws so as to facilitate the extraction of economic rent rather than view such rent as a vile thing to avoid. Unions have embraced economic rent too as long as they get a piece of the action. Where do you think the crazy concept of “assumed rates of returns’ derives its origin? Public employees, through fully funded pensions, get both the benefit of rent AND the sovereign authority to extract taxes. The pension obligation bond frenzy is so devoid of “public purpose” and so fully bypasses even the economic rent concept that only an economist could see through the haze. Public employee wages are best looked upon as a “wage subsidy” with a slight boost to allow accumulation of wealth. (I call it glorified welfare.) Though the ends, economic equity, might be laudable it is achieved only through non-competitive means and only lifts a few above the break-even point compared to one another.

The thing that drives innovation is the mere hope of transitioning from laborer to capitalist. The hope of accumulating a little bit, free from the government and creditors, will itself provide a taste of freedom that could someday translate into dreaming of starting ones own business with at-risk capital. Unionized dreamers dream of maximizing both rent and taxes as THE solution.

Suppose an alternative remedy --

If ALL the assets, personal and real, of the poor (defined as wealth, not income, below X) were treated in like manner to a retirement account – excluded from judgments and taxation – then the poor who work could make incremental improvements in individual cases. Assets used in calculating X would have to include the present value of all trusts and annuities.

The path to success must be divorced from the political process of picking winners and losers, and restore consumer sovereignty. Also, the capital market today is so flush with risk free, tax backed, substitutes that no so-called capitalist need expose himself (or herself) to risk. No laborer can make the transition unless the most recent winners put their money back on the table. Imagine the star of a simple life having to use her head to invest wisely and visualize how things would shake out over time. Imagine credit card companies bearing the full risk of their losses without denying the bankrupt the right to get a “fresh start.” Imagine if home prices went down with the market just as with any other consumer good. Imagine if all the costs for basic individual worker survival were treated in like manner to gasoline is to the airline industry. A wage subsidy makes as much sense as putting the full cost of the Iraq war upon the cost of gasoline, both would result in the search for substitutes. Abandoning price supports, including political tolerance for anti-competitive pricing, for the cost of housing, food and medical care is in our collective best interest and will create jobs and wealth accumulation among the poor.

Simulated capitalism, controlled through politics, has no greater likelihood of success here than it did in the Soviet Union. I do not want to remain a state slave, and besides, it is devoid of stimulating the dream of breaking out from the pack through entrepreneurial talent. Let creative destruction work its magic to shape the future rather than let the politicians try and lock in the present winners into a forever-winner thing. Put risk back into Capitalism and ban the phrase "assumed rates of return."

Lawrance George Lux writes:

Boonton,
The education and training is an economic function, not a social or political function. The cost should be placed upon the Employer. A percentage tax upon all Wages paid could do this, and at much less cost to the Economy than forcing Parents and Communities to bear the cost. Employers would admittedly pass the training costs onto the Consumers, but such passage would incite maintenance of proper Wage levels.

Your excitement about a mandated Workweek has no basis in fact. There is no insistence that Employees limit their labors, as additional Part-time work is always an option. Many young Workers with families would work two full-time Jobs for a total of 64 hours. The double-time pay for Overtime constrains Employers to train sufficient labor to avoid excessive labor costs, with a residual trained labor force during peak performance under Boom conditions. By the way, I have worked two full-time Jobs, as while as attending college full-time with an additional full-time Job. lgl

mcwop writes:

LGL,
Your proposals are at work in places like Europe. The result is high unemployment. Adding more payroll taxes, and lowering hours worked will send more jobs overseas as fully loaded labor rates increase.

Additionally, not all U.S. workers are paid hourly. Many are exempt and paid a salary to do a specific job. How do you deal with lawyers or doctors, who are paid on billable hours or how many patients they see?

Your proposal is a one size fits all - "command and control" - policy.

Flat tax with the first $40,000 exempt from all taxes (including FICA) to the employer and employee.

Boonton writes:
The education and training is an economic function, not a social or political function. The cost should be placed upon the Employer. A percentage tax upon all Wages paid could do this, and at much less cost to the Economy than forcing Parents and Communities to bear the cost. Employers would admittedly pass the training costs onto the Consumers, but such passage would incite maintenance of proper Wage levels.

A cost already is placed upont the employer, its called wages. An employer must pay more to aquire a Phd than a HS grad. This system allows individuals to decide what education investments are worthwhile for themselves to undertake by allowing them to directly reap the rewards in the form of higher pay.

Your excitement about a mandated Workweek has no basis in fact. There is no insistence that Employees limit their labors, as additional Part-time work is always an option. Many young Workers with families would work two full-time Jobs for a total of 64 hours. The double-time pay for Overtime constrains Employers to train sufficient labor to avoid excessive labor costs, with a residual trained labor force during peak performance under Boom conditions. By the way, I have worked two full-time Jobs, as while as attending college full-time with an additional full-time Job. lgl

Why is the market unable to find the right balance in this case? I ask this of conservatives who announce that the gov't tax policy must be re-engineered (yet again) to provide additional incentives to save & invest. Far from reducing 'excessive labor costs', your proposal would increase them. It would be more efficient for some workers to work 50-60 hours at a single job rather than split two 30 hr jobs at two different firms. By robbing both workers and employers of that choice you don't free up an additional full-time or part-time job, you just reduce the total wealth of the economy.

Lawrance George Lux writes:

Mcwop,
The transference of educational cost to the Employers from the Communities, will lower Wage scales in the long-run, and will lower actual labor costs after adjustment of current taxation to provide these facilities. A percentage tax on total Wages paid does not require individuals be paid an hourly rate. The European systems are more like the current American system, than they are as I propose; they combine a entire series of competitive efforts to derive revenues, rather than systematically organize a tax impact placement system.

Boonton,
"A cost already is placed upont the employer, its called wages. An employer must pay more to aquire a Phd than a HS grad. This system allows individuals to decide what education investments are worthwhile for themselves to undertake by allowing them to directly reap the rewards in the form of higher pay."

You highlight the problem in a nutshell, by stating Employers pay more for levels of Education. You and Employers ignore minimal levels of education are necessary in the modern Workplace, and would underfund these minimal levels. Provision of these minimal levels of education is equally as costly to Parents and Communities as is collegiate education, but You and Employers would like reimbursements to be marginalized. This is why your argument about Employers paying Wages is falicious.

I would raise Labor costs for Employers, because it is economically right to do so, just as I would implant a low uniform tariff for the same reason. You latter argument is also somewhat flawed, using scenerio information appliciable in the Short-run, with alteration of Wage rates removing Employer losses at Double-time pay for necessary Employees, and Employee ability to adjust their own work schedules. Most Employers would find greater ease with a Unit Employment package, with set Wages and Benefits. lgl

mcwop writes:

LGL,
How would your proposal work on a sole proprieter? What % of their wages will they pay for this education tax?

Lawrance George Lux writes:

Mcwop,
Almost all sole proprietors list a salary for themselves on their Tax Returns. Those which don't would simply be attributed equivalent salary to industry standard, then taxed. It is no big thing, with the tax assessment estimated to vary in accuracy for such tax by no more than $300 per year. lgl

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