Sep 18, 2018

Why the "Stop BEZOS Act" Would Hurt Those It Seeks to Help

Senator Bernie Sanders’ (I-VT) and Representative Ro Khanna’s (D-CA) recently proposed bill, the “Stop BEZOS Act”, is almost certainly well-intentioned, but it won’t have the effect that they intend. The legislation aims to punish companies whose employees benefit from federal social safety net programs by charging them a tax equivalent to the value of the federal program spending used by their employees. But the motivation for the policy—a populist idea that social safety net programs subsidize corporations, allowing them to pay lower wages—is incorrect; the labor market doesn’t work the way that the policy’s proponents think it does.

First, rather than helping low-income people to make ends meet, the ‘Stop BEZOS Act’ would instead motivate employers to hire workers who are less likely to use social safety net programs. This is because the proposal increases the cost of hiring someone who is more likely to use social safety net programs relative to someone who doesn’t.

Consider it from the standpoint of a manager of a retail store looking to hire a new cashier: she has to make a hiring decision between a job applicant who may have dependent children (and therefore is more likely to qualify for federal social welfare programs) and a teenager who is probably part of a household supported by working parents (and therefore probably doesn’t directly qualify for welfare benefits). If she expects that either will satisfactorily perform the job, she’ll be motivated to choose the job applicant she expects to cost less—the teenager. By reducing employment opportunities, Sanders’ proposal could inadvertently transform federal social welfare programs into a net that ensnares poor people, rather than a trampoline which helps them vault back into self-sufficiency.

And because Sanders’ plan would prohibit employers from asking whether a job applicant uses federal welfare programs, the problem would actually spill over onto people who don’t use these programs. Economists call this kind of decision-making phenomenon “statistical discrimination.” In effect, a lack of individually-specific information means that the employer has to rely on other observable characteristics to gauge how costly the job applicant might be (essentially similar to relying on stereotypes). This means that people who don’t use safety net programs could be treated as being a potentially higher cost employee if they are generally similar to people who would be more likely to use the programs.

Second, the new tax will increase the cost of production, which employers will inevitably compensate for by raising prices. The rising prices will hit low-income earners especially hard since they are more likely to shop at the discount retail stores that tend to pay lower wages. Higher Walmart or Amazon prices would have a smaller proportional effect on a middle-class household’s budget than a family that is already struggling to make ends meet. Although Senator Sanders probably intends for his bill to impose costs on wealthier people—after all, the name of the legislation is the “Stop BEZOS Act”—it is the poor who will suffer the most from the price hikes that his bill will cause.

More generally, Sanders’ plan misunderstands why wages are low. In most cases, the reason isn’t miserliness or misanthropy on the part of employers. The real driver of low wages is the preference of consumers for low prices. In trying to satisfy this preference, businesses are motivated to minimize their cost of producing goods or providing services. And in a somewhat counter-intuitive fashion, the people who benefit the most from entrepreneurs finding new ways to decrease costs are the low-income households whose buying power expands with each new cost-saving innovation

Third, there are better ways to help the poor. One option is to reform and expand the Earned Income Tax Credit (EITC), a forty year-old program that provides a payment through income tax returns for individuals with low incomes. The EITC is better targeted to providing help to those who need it, unlike the ‘Stop BEZOS Act’ or a one-size-fits-all approach like raising the minimum wage, because it’s tailored to income level (rising for lower incomes) and to family size (taxpayers with more dependents receive larger tax credits).  And lower-income people are motivated to seek employment to qualify for the program, which is likely to help them build job market skills that could allow them to earn higher wages in the future.

Some pundits have attacked the EITC because by making work more desirable for job applicants, the tax credit inadvertently benefits businesses by partly subsidizing the wages that employers pay (It should be noted that this is different than government welfare programs which are not work-dependent, meaning that they actually raise the wages the employers must pay to attract workers). However, by lowering the cost of employment that employers pay, the EITC tends to increase the employment of the very people that social safety net programs are intended to help. And in the process, the EITC may decrease the safety net program payments the government might otherwise spend.

In short, other policies could more effectively assist the same demographic that Sanders is concerned about—working people who nevertheless don’t take enough money home—but without the negative effects that the ‘Stop BEZOS Act’ is sure to cause.

Photo credit: Geoffrey Robinson/Shutterstock

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