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A Better Way to Fight ‘Corporate Welfare’

Bernie Sanders wants to make Amazon and other corporations cover the cost of public benefits for their low-paid workers. Why not reform the Earned Income Tax Credit instead?

Alex Wong/Getty Images

Senator Bernie Sanders has spent much of the summer highlighting the low wages at major American corporations and contrasting it with the astronomical pay for top executives. The title of a town hall in July made his point clear: “CEOs vs. Workers.” (The workers showed up; the CEOs didn’t.) A petition he launched in August targeted Amazon specifically, noting that CEO Jeff Bezos makes “more money in ten seconds than the median employee of Amazon makes in an entire year” and arguing that “thousands of Amazon employees are forced to rely on food stamps, Medicaid and public housing because their wages are too low.” 

This assistance amounts to a form of “corporate welfare,” Sanders argued, and earlier this month he and California Representative Ro Khanna introduced a bill that aims to curtail it. The Stop Bad Employers by Zeroing Out Subsidies Act (Stop BEZOS) would require companies with 500 or more workers to reimburse the government for the cost of the Supplemental Nutrition Assistance Program (SNAP), Medicaid, school lunch, and Section 8 benefits claimed by their employees. The bill received predictable pushback from the employers targeted, but it also was criticized by a variety of experts on the left.

Stop BEZOS, progressive wonks argued, not only stigmatized programs like SNAP, but misunderstood how those programs work. Because these benefits aren’t predicated on work, they aid low-wage workers, not low-wage employers. The only thing Stop BEZOS might accomplish, critics said, is incentivizing employers like Amazon to avoid hiring workers, such as single parents, that are likely to be eligible for public assistance. The bill’s proponents didn’t take the criticism lightly. Sanders’s policy director, Warren Gunnels, created a stir when he claimed that one of the plan’s critics, the Center for Budget and Policy Priorities (CBPP), was motivated by its receipt of donations from the Walmart Foundation. 

Sanders and Khanna are right that parts of the threadbare U.S. safety net act as a form of corporate welfare, but they singled out the wrong parts. If progressive legislators and wonks are serious about making sure that public assistance intended for the poor doesn’t flow to companies like Amazon and their billionaire owners, they need to fix the Earned Income Tax Credit and challenge the conservative “pro-work” philosophy that underpins it.

The Earned Income Tax Credit (EITC), which was claimed by 27 million workers and families last year, is a refundable tax credit that’s tied to a worker’s earnings. Starting with the first dollar of earned income, the EITC gradually phases in, growing larger with each additional dollar of earned income until it reaches a maximum amount. Workers who don’t earn the full phase-in income—currently about $10,000 for a worker with one child—don’t get the full EITC credit. The EITC also phases out as a worker earns more than the full-credit income. At that point, each dollar of earned income gradually reduces the value of the EITC until it reaches zero. 

In its four-decade history, the EITC has enjoyed enviable bipartisan support. It’s been expanded by Democratic and Republican presidents alike, growing dramatically in both the size of the credit and total cost of the program, and ultimately assuming the role of the largest anti-poverty program for the non-aged. Democrats and liberal think tanks have put forward an endless array of proposals to expand it—something that both Khanna and the CBPP, despite taking opposite stances on Stop BEZOS, have championed. Meanwhile, Republican House Speaker Paul Ryan called the EITC “one of the federal government’s most effective anti-poverty programs” and put forward his own expansion proposal. 

The EITC has flourished despite—or perhaps because of—the racist and anti-poor assumptions that animated its creation. By the mid-1960s, both liberals in the Lyndon Johnson administration and conservatives like Milton Friedman had coalesced around the idea of replacing the complex, paternalistic system of cash welfare then known as Aid to Families with Dependent Children (AFDC) with a “negative income tax” (NIT) that would level up every poor person to a basic income amount, regardless of whether they worked, then phase out gradually as work income replaced NIT dollars. President Richard Nixon embraced a moderate version of the idea with his Family Assistance Plan (FAP), while progressive activists in the National Welfare Rights Organization (NWRO) pushed liberal Democrats to back their more generous proposal. Ultimately, Senator George McGovern made a $1,000 “demogrant” that would have gone to every American regardless of income or work—thereby making it more of a “universal basic income” (UBI) than an NIT—central to his 1972 presidential campaign.

For conservative Republicans, none of these proposals was acceptable. But as chair of the Senate Finance Committee, conservative Louisiana Democrat Russell Long led the charge in killing any variant of an NIT/UBI. While Long had no problem defending various forms of corporate preferences embedded in the tax code, he had deep antipathy for the non-working poor. He allegedly referred to the NRWO—which featured many African American mothers in its leadership—as “Black Brood Mares, Inc.” and slammed NIT/UBI proposals as plans to “reward idleness and discourage personal initiative” by “paying people not to work” and “lay about all day making love and producing illegitimate babies.” Instead of giving the poor (or every American) money regardless of whether they worked, Long proposed a “work bonus” tied to employment. This “work bonus” ultimately became the EITC, which President Gerald Ford signed into law as part of the Tax Reduction Act of 1975.

Long’s work-conditional vision captured the shift to the right on welfare taking place in both parties. Ronald Reagan, who’d strenuously opposed FAP, filled the void in the GOP left by Nixon in the wake of Watergate, while moderate Democrats like Bill Clinton assumed power in the Democratic Party in the wake of McGovern’s defeat. Reagan famously demonized a “welfare queen” in his failed 1976 campaign for president, and as president he pushed cuts to a variety of safety net programs in order to combat what he called “welfare culture.” Clinton ran for president in 1992 as an unabashedly anti-welfare, pro-work Democrat, pledging to “end welfare as we know it” by forcing the poor off of the welfare rolls and into the workplace.

Conservatives (and some liberals) are fond of quoting liberal economist Arthur Okun’s likening of income redistribution to a “leaky bucket.” According to Okun, both administrative costs and foregone economic growth mean that if the government takes a dollar from the rich, it won’t necessarily be able to give that entire dollar to the poor. While the size of the leak is hotly debated—and despite the fact that Okun argued that we should be willing to tolerate significant leaks for the sake of greater equality—the leaky bucket has become a staple of Econ 101 as a representation of the unintended consequences and inherent “inefficiency” of social welfare programs. 

But programs like the EITC are the leaky bucket we should really worry about. Because the credit is conditioned on work, it expands the supply of available labor and increases the power of employers relative to workers. The program thus drives wages down to the extent that a dollar spent on EITC only raises worker wages by around 70 cents, while employers keep the rest, according to research by economist Jesse Rothstein. (Other scholars have reached similar conclusions.) So a substantial chunk of the $60-plus billion spent on the EITC every year really is the type of “corporate welfare” that Sanders rightly decries. 

The “end of welfare” has had a predictably deleterious impact on the most vulnerable, pushing them into deep poverty, and tying assistance to work has placed programs like the EITC out of reach for the (disproportionately black and Latino) Americans who can’t find work. The U.S. simply can’t afford to let nearly a third of its largest non-elderly anti-poverty program “leak” back to companies like Amazon and Walmart. If Sanders and Khanna want to rid the safety net of hidden corporate welfare, they’d do well to propose ending the EITC’s work requirements and turning it into an NIT, providing every poor person with a basic income regardless of work. According to Rothstein’s estimates, an NIT would have the opposite effect of the EITC. An NIT would increase workers’ bargaining power, thereby increasing wages for those at the bottom by $1.39 for every dollar spent. 

But making a full-throated case for the NIT will require Sanders, Khanna, and other left-wing lawmakers to stop equating work with deservingness—an association that “job guarantee” proposals, and mantras like “Nobody who works 40 hours a week should be living in poverty” inadvertently deepen. It will also require letting go of the myth that Republicans will accede to social programs tied to work. There’s a reason that Paul Ryan’s modest expansion of the EITC went nowhere. The GOP’s support for the EITC has always been exaggerated, and Republicans recently have attacked the EITC over (virtually nonexistent) fraud. For Republicans, work requirements are merely the precursor or second-best alternative to outright cuts.

At the very least, Democrats should move the EITC towards a de-facto NIT by setting the phase-in of the full credit to as low an income as possible. While the prospect of the non-working poor declaring phantom “earned income” to qualify for the EITC is an absurd exercise in tax chicanery, it’s certainly no worse than what many rich Americans get away with every year, and it’s significantly better than the status quo, where employers capture a substantial portion of the EITC and the non-working poor get nothing.