Warren Buffett Says EITC is a Better Economic Driver Than Minimum Wage

A recent report commissioned by Puerto Rico’s Government Development Bank suggested lowering the minimum wage in Puerto Rico.

There may be a better option.

Warren Buffett wrote in the Wall Street Journal that the growing gap between the incomes of higher-wage workers and minimum wage workers is a natural consequence of the development of an advanced market-based economy. He cites two main objectives with respect to the U.S. economy and wages: (1) provide every person willing to work with an income that enables him or her to live a decent lifestyle, and (2) do not distort our market system in the process.

According to Buffett, initiatives to alter the minimum wage do not achieve the second objective.

Buffett’s proposal to create a sound economy with livable wages is not to tinker with the minimum wage.  The “better answer,” explains Buffett, “is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC).”  This is a tax credit paid to people who work, but do not earn enough to live on. It has shown itself to be an incentive to to work and to be correlated with college attendance for the second generation — and thus a path out of poverty.

“In essence,” says Buffett, “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.”

The EITC is not available to residents of Puerto Rico. The exclusion of Puerto Rican residents – who are U.S. citizens – from this federal initiative is often justified by fact that Puerto Rican based wages are not subject to federal income tax.  Yet a distinguishing feature of the EITC is that it is refundable – meaning that workers living in any of the fifty states who do not have any tax liability recieve an EITC refund check in the mail during tax season. Half the U.S. citizens living in the United States do not currently pay federal income taxes — and that includes the recipients of Earned Income Tax Credits. Based on the experience of the EITC in the fifty states, extending the EITC to Puerto Rico would be likely to encourage labor force engagement, one of the goals identified by the government report, and bring funds into Puerto Rico’s economy at the same time.