Wednesday, March 4, 2009

Gamma Claims: Nixon, Reagan - Not Capitalist, Favored Redistribution

First, I will start off with a quote of my own:

"There is no reason why in a society which as reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all . . . . [B]ut there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody." 

The Road the Serfdom,  F. A. Hayek.

Adhering to these principals, the Nixon administration first proposed the earned income tax credit.  This Republican-created tax policy rewards work  and discourages welfare-induced sloth.  At its outset, the EITC was touted as a superior alternative to either welfare, or increases in the minimum wage:

1) It is less expensive.  It is much less expensive for the government to forgo $2000 or $4000 in tax revenue from a working family than it is to flatly support an entire non-working family.

2) It rewards work.  The earned income tax credit ensures that a person working even the most humiliating, minimum wage job will have a higher standard of living than those surviving on welfare alone.  In order to be eligible for the credit, you must have a valid SSN, you must work, and you must pay taxes.

3) It rewards income reporting.  In order to receive the credit, a person has to report income and pay taxes just like everyone else.  This encourages people into legitimate labor pools and discourages cash-only, non-incoming reporting jobs.

Reagan liked the program so much, he pushed for and obtained an expansion of the EITC in 1986.

Now, under a Democratic president, a similar expansion is being touted by some as redistributionist, socialistic, and anti-capitalist.  Sadly, these folks have strayed from the ideals and policies of their political and ideological heroes. 

To the extent GG alleges that an EITC expansion amounts to people voting themselves benefits from the public treasury, the argument lacks perspective.  The EITC costs a modest $36 billion a year; whereas "the majority" helped themselves to ten times that much worth of tax cuts in 2004.  But when Republicans vote themselves largess, it's virtuous; when Democrats do it, it's a step on the road to tyranny. 

So let's forget that the Bush tax cuts cost us $2 trillion.   Let's forget that the war in Iraq (not a war of necessity, but a war of convenience) cost us $3 trillion.  Let's forget that the final tab for the Bush years is going to run us $10 trillion.  The real threat to our democracy is embodied in a $36 billion per year program that gives up to $4,000 in tax credits to a family of 4 earning less than $38,000 a year.  

What is really at work here is the need to mitigate the complete stagnation in real wage increases for the vast majority of Americans.  Take a look at the graph below:


This charge tells at least two stories:  First, it explains the increased tax burden for high earners (they were earning a lot more money than the rest of Americans).  Second, it illustrates that the middle and lower classes obtained very little wage growth during the Bush years.  In the absence of real wage growth for many of these Americans, the EITC is an effective tool for adjusting real wages and is preferable to increasing in the minimum wage.  Don't take my word for it:  conservatives consistently made this argument in the age before Obamanomics.  So why value consistency and intellectual honesty when it's so easy to vilify and tar the policies (which conservatives created and once championed) as redistributionist?

GG's argument focuses on federal income taxes, which ignores the fact that 36% of Federal revenue comes from payroll taxes.  If one takes all federal taxes into account, then the top 5% of earners (whose income started at $224,850 and who took home 32% of all income in 2008) will end up paying 44.8% of all federal taxes (which also includes corporate and estate taxes).  Meanwhile, the bottom 40% (those with incomes of $37,257 and below) earned 11.4% of all income and actually did pay federal taxes to the tune of 3.4% of the total.  If those poor people weren't so poor, they would pay more taxes. 

In summary, the EITC expansion is not socialism; rather, it attempts to achieve acknowledged and legitimate social goals using  a Republican-created policy device that conservatives supported for decades.  The relative cost of the expansion is modest and is dwarfed in comparison to the credits the GOP heaped upon their wealthy constituents. 


Restless Native said...

Way to go, Tomb.

friedmanite said...

Nice post, you know it'll perk my attention when you start with a Hayek quote. Not sure if you're an unabashed democrat, but if so, I'm sure you've noticed a lot of democratic policies contradicting Hayek's words, especially those favoring central planning of the economy (which the stimulus would fall under). Republicans too, don't take my anti-democrat stance as supporting the elephants.

As for your argument, you did ignore Obama's rhetoric about forgetting about special interests. One look at the stimulus will show that isn't so.

I do have something to add about the earned income tax credit. Milton Friedman wrote about this a lot, which is why I assume Reagan supported it. Friedman called it the negative income tax (which I assume is similar to the EITC), and proposed it to replace all the overlapping and inefficient welfare programs. His point was that it would be more fair and much easier to administrate.

I support using it in that way, as long as the values are set low enough so that the incentive to work remains. At some point, a negative income tax could be set high enough that people can live comfortably, removing their incentive to work to make more money.

I haven't studied this EITC proposal in any detail, but hopefully it would keep the proper incentives in place to ensure a minimum level of income for everyone while encouraging them to work to make more.

VooDoo said...

To say Aztec and Restless are "unabashed democrats" would be an understatement.

Restless Native said...

I was a young Republican before the nut-job religious psychos took over the party. I voted for Bush pere in '92. As I think VooDoo can attest, I don't normally half-ass things, and when I was drummed out of the GOP I took it as a challenge to go whole-hog donkey. While I still maintain some differences with the Dems they largely speak to me more than the Pubes.

Friedie, welcome back and do, pray tell, let us know what you think about BHO's take on agro subsidies. I got Gams to admit that he thought it encouraging that Hizzoner would take them on but made some allusion to that being the avocado on a shit sandwich.

I think, for any politico, that taking on big agro is huge. As I have mentioned, I am a fan of free trade and I think subsidies to plow under fields, produce carcinogens, or to simply tinker with the market price for food is more Chavez-esque than anything coming out of 1600 PA St this minute.

Taking on essentially every legislator from a state receiving agro subsidies (and, kids, that's pretty much all of them) take bronze stones.

LPJ said...

Dammit, I thought it started with a Salma Hayek quote.