Warren Buffett used a recent piece in the Wall Street Journal to propose a solution to the increasing wealth gap in the United States.
First of all Warren Buffett explains how the American Dream has turned into the American Nightmare for many of the nation’s residents, as wealth becomes increasingly concentrated in the hands of those with specialized skills. Although some members of society have risen from humble beginnings to achieve success, those without relevant skills are increasingly left behind.
Poverty figures remain stubbornly high
The most damning statistic is that the percentage of Americans living below the poverty has decreased just 0.5% in 31 years. In 1982, 15% of Americans were below that line, while in 2013 that proportion had dropped to 14.5%.
Warren Buffett does not push any conspiracy for this fact, but instead sees it as a consequence of our advanced market-based economy. In the agrarian society of years past, the productivity of the least and most skilled workers was relatively similar, but now the skills of much of the labor force are not matched with the needs of the market.
Education cannot save us from a situation in which a great number of jobs are now being performed by machines. An advanced economic system inherently leaves a huge number of the population behind.
Warren Buffett: EITC reform could offer a solution
In order to address that problem, Warren Buffett does not advocate increasing the minimum wage, which he says would drastically reduce employment and leave those with only basic skills in serious trouble. Instead he proposes that the Earned Income Tax Credit (EITC) be extended. Low-income workers receive the credit, and payments decrease as their earnings increase.
However there is no disincentive effect because higher wages will always lead to a higher overall income. All that recipients have to do is file a tax return and wait for their check from the government.
Warren Buffett says that the EITC rewards work and does not distort the market, enabling employment to be maximized. The existing EITC requires an overhaul, not least to stiffen penalties for fraud and raise awareness of the help available to workers that need to file a tax return. Warren Buffett proposes that the EITC be paid on a monthly basis in order to reduce reliance on loans, while overall payments should be increased.
Warren Buffett envisages a system that rewards those who are willing to work with a livable income, but admits that there is no perfect solution.