The world’s third-richest man weighed in on the national debate over rising levels of income disparity in the United States yesterday, saying that while the gaps between the country’s haves and have nots are definitely increasing, it is not the fault of those at the top. Nor will it be solved by traditional methods, like improving education or hiking the minimum wage. His solution: Increase access to the Earned Income Tax Credit.
“No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich,” Buffett, whose net worth we clock in at $71.3 billion, wrote in a Wall Street Journal opinion piece published late yesterday. “Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like. Instead, this widening gap is an inevitable consequence of an advanced market-based economy.”
That’s not to say the gap isn’t growing. Citing data from The Forbes 400 list of the richest Americans, he said that the total net worth of those on the list in 1982, the first year the list was compiled, was $93 billion. In 2014, that number was $2.3 trillion, up 2,400%. At the same time, median household income in the United States rose only about 180%, he said.
Improving education, won’t work fast enough, or go far enough, he said. And fighting to raise the minimum wage—currently in vogue among many on the left—won’t bridge the gap either, he says, and may actually backfire by hurting employment. “The better answer,” he said, is an expansion of the earned income tax credit, a federal tax credit targeted at working class Americans which gives them a credit starting with the first dollar they earn and rises until it hits a ceiling, then phases out from there.
According to the Center on Budget and Policy Priorities, more than 27 million taxpayers got the ETIC in 2013 and in the 2012 tax year, the average EITC was $2,982 for a family with children.
“There is no disincentive effect: A gain in wages always produces a gain in overall income,” writes Buffett. “The process is simple: You file a tax return, and the government sends you a check. In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.
That distortion is the main criticism of opponents of raising the minimum wage. Arbitrarily increasing the amount employers are required to pay workers, as cities like Seattle, and most recently Los Angeles have done, is a disincentive to hiring or retaining workers, especially those at the lower end of the economic ladder who most need a job.
“I may wish to have all jobs pay at least $15 an hour,” writes Buffett. “But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.”
Before you agree, its worth noting that not everyone is a fan of the plan. My colleague Kelly Phillips Erb, who knows a fair amount about the tax code, cautions that the EITC is filled with errors and fraud. She cites two government studies which find an “improper payment error rate” of somewhere around 25 percent–that’s one in four filings–amounting to more than $13 billion “paid out in error,” she says.
Beyond that, she says, it is simply another attempt to use taxes to shape behavior. And that’s not what taxes are for. “If folks need a hand up, we should make help available,” she wrote earlier this month when Buffett floated the idea. “I just don’t think that our Tax Code is the right mechanism for doing it (anymore than I think we should use taxes to encourage home ownership or discourage drinking big sodas).”