Warren Buffett identifies the 'single best way' to help struggling Americans

Markets Correspondent
Yahoo Finance

Yahoo Finance will host the live stream of Berkshire Hathaway’s shareholder meeting at 10 a.m. EST on May 6, 2017.

Concerns about rising inequality remain front and center, particularly in light of President Trump’s new tax blueprint, which some say could exacerbate the problem.

“America has never been wealthier than it is today,” Warren Buffett told Yahoo Finance. “The inequality bothers people including me.”

“I would think there shouldn’t be anyone who is willing to work 40 hours a week and has a couple of children, where that doesn’t give them a fairly decent standard of living,” he said. “Our market system as it gets more specialized produces more overall wealth but also leaves significant numbers of people behind.”

While many legislators have pushed for raising the minimum wage, with more and more cities across the US roll out higher minimum wage laws, Buffett does not favor this solution. In an op-ed for the Wall Street Journal in 2015, Buffett wrote that raising the minimum wage would actually create more problems for our market system.

Instead, he offers a different way to help and incentivize struggling Americans.

“The Earned Income Tax Credit is the single best way,” Buffett said.

The Earned Income Tax Credit

Buffett has long supported the expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers.

“Payments to eligible workers diminish as their earnings increase,” he explained in the WSJ op-ed. “But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.”

For Buffett, the EITC is a better solution because it’s about more than just money.

“In essence, the EITC rewards work and provides an incentive for workers to improve their skills,” he continued. “Equally important, it does not distort market forces, thereby maximizing employment.”

Buffett added that the plan needs improvement including reducing fraud, shifting payments to monthly installments from annual, and increasing dollar amounts for those earning the least.

The International Monetary Fund has warned the United States over poverty and rising inequality. (AFP Photo/Jewel Samad)
The International Monetary Fund has warned the United States over poverty and rising inequality. (AFP Photo/Jewel Samad)

Other business leader support

In his annual letter to shareholders, JPMorgan Chase (JPM) CEO Jamie Dimon emphasized the need to start “investing in our people” and help lower-skilled workers earn a living wage.

He specifically promoted the EITC as well, to supplement low-paid workers’ incomes. For example, he explained, a single mother with two children earning $9 per hour ($20,000 per year) could get a tax credit of more than $5,000 at the end of the year.

As Dimon explained, while the program has flaws, it has brought about 9 million people above the poverty line. (For a four-person household, the income at the poverty level stands at $24,600 a year or approximately $11 an hour).

Stagnating income and limited job prospects have disproportionately affected lower-income and lower-skilled Americans, leading inequality to rise. This is reflected in the chart below from the Harvard Business School US Competitiveness Study conducted last year.

Dimon pointed out that over 20 million American workers earn between $7.25 an hour (the current federal minimum wage) and $10.10 an hour. And over 40% of American workers make less than $15 per hour.

“I believe we should dramatically expand the EITC to help more low-paid individuals with and without children, earn a living wage,” Dimon wrote in the letter.

The reason? To incentivize people to get back into the workforce.

“I have no doubt this will entice more workers back into the workforce. Jobs bring dignity,” he wrote. “Studies show once people start working, they continue working.”

In addition, he highlighted that living wages lead to less crime, more household formation and better social outcomes.

Buffett has remained pessimistic about progress being made in this regard, however.

“Clashes of that sort have forever been with us – and will forever continue,” he said in his 2015 shareholder letter. “Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.”

Nicole Sinclair is markets correspondent for Yahoo Finance.

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