Minimum Wage vs. EITC: Who Pays?

My co-blogger Mike Makowsky has a great post earlier this week about the minimum wage. Go read it before you read my post. When Mike said he was bothered by the notion that “the welfare state must be channeled through employment,” I very much nodded in agreement. It reminded me of a frustration I have with the entire debate about the minimum wage vs. the Earned Income Tax Credit as policy tools to help out the least well-off in society (yes, some argue they are complements, but let’s put that debate aside for the moment).

Here’s my frustration. In both the popular discussion and occasionally among academics/policy wonks, the difference between the minimum wage and the EITC is often framed this way: employers pay for the minimum wage, but the government pays for the EITC. I know there are important questions about the incidence of the minimum wage, but let’s assume that the proponents of higher minimum wages are correct, and the full cost comes out of business profits.

But the distinction between “employers” and “the government” is not a useful one. Where does the government get its revenue to pay for things like the EITC (or alternatively, food stamps)? They must come from society. There is some diversion of real resources from Group A to Group B. Group A is, in the case of the minimum wage, the owners of businesses — in other words, individuals with high incomes. Group B is the workers. But this is true in the case of both the minimum wage and the EITC!

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