D.C.'s Paid Leave Proposal Is Very Good

The Washington Post Editorial Board penned a piece arguing that a paid leave proposal circulating in D.C. right now goes "way too far." As a lover of all things welfare, obviously I think the opinion's conclusion is wrong. But it is worse than that. The argument for reaching the conclusion is also just confused and misunderstands basic elements of the paid leave argumentative terrain.

1. The Proposal

As described by Matt Yglesias, the D.C. proposal is as follows. A progressive payroll tax of 0.6% to 1% will be levied. Those revenues would then fund 16 weeks of publicly-administered paid family leave. The leave benefits would replace 100% of weekly pay for the first $1,000 of average weekly earnings and 50% of weekly pay for the next $4,000 of average weekly earnings (for a maximum benefit of $3,000 a week). So, in total, it is a progressive tax to fund a universal earnings-related paid leave benefit that has progressive income replacement levels. This is the gold standard in income-replacement welfare benefit design.

2. Washington Post's Arguments

The Editorial Board provides 3 arguments against the proposal. I address them in order below.

2a. Some Employers Already Provide Paid Leave

Here is the Editorial Board:

Putting aside the very real concerns about the city’s ability to operate such a program and its costs, there is a basic problem in the city’s failure to take into account employers that already provide paid leave. Why should a company that already offers a range of leave options (vacation, sick time, short- or long-term disability insurance) be required to pay into this fund? Won’t that induce companies to cut back on pay and other benefits or just move to Virginia or Maryland?

This reveals a basic misunderstanding of how labor compensation works. Employers that already provide paid leave do not do so as a form of charity. Rather, they levy an internal implicit tax on their employees in order to fund their paid leave programs. That is, they reduce the amount of wage/salary compensation they provide in order to fund labor compensation in the form of paid leave benefits.
 
The payroll tax being proposed by the D.C. government is no different, except that it seeks to replace the implicit tax levied by employers to fund private paid leave benefits with an explicit tax levied by the D.C. government to fund public paid leave benefits. This universalizes the benefit and takes the tax and welfare administration out of the hands of employers and puts it into the hands of the state.
 
Companies that currently provide paid leave would have to adjust their benefits to the new public benefit landscape. This is not hard to do. You take the labor compensation that you are currently retaining to fund private paid leave and you give it over to the state (in the form of payroll taxes) to fund the public paid leave. Companies that currently provide benefits that are the same as or worse than the D.C. benefit proposal would just eliminate their paid leave benefits altogether. This is not a problem seeing as there is now equal or superior public paid leave. Companies that provide better paid leave benefits than D.C. is proposing would transform their private benefits into a supplemental benefit that tops off the public benefit. This is not uncommon in parts of the world where public paid leave exists (that is, nearly all developed countries).
 
2b. Companies Will Flee the 0.6% to 1% Tax
 
The Editorial Board wonders whether this will cause companies located in D.C. to move to Virginia or Maryland. The answer to this question is no.
 
Regardless of who the tax is officially levied on, it is not the companies that will pay it. Rather, it will come out of labor compensation. That is, the workers will be "paying" for it. Thus, this does not impose extra costs on businesses (as the Editorial Board seems to think). Instead, it reduces the amount of net-of-tax private compensation that the companies will give to their employees.
 
Thus, an argument that this would put D.C. businesses at a competitive disadvantage would have to focus on the labor side. So, if you wanted to push this point, you would have to argue that D.C. businesses will no longer be able to attract good employees if they are forced to pay 0.6% to 1% less to them, and thus will need to move to Virginia or Maryland where they can attract good employees by offering slightly higher compensation levels due to the different tax environment. This is pretty unlikely given the small percentages involved, especially when you consider that the employees being asked to endure this slightly lower compensation are actually getting something for the reduced compensation, nice paid leave benefits, that they wouldn't get in Maryland or Virginia.
 
Additionally, much of D.C. employment revolves around the federal government and is not easily moved, hotels and service jobs are also location-specific, and it's not as if D.C. is struggling to attract employers who want to operate in the city (look at the sky high office rents).
 
2c. Universal Benefits Are Bad
 
Here is the Editorial Board:
 
More significantly, this broad-brushed approach doesn’t target resources to the workers who are most in need. Low-income and minority groups have the least access to paid leave options, so it would be far more sensible for the city to design a program that helped them most. That would be the truly progressive option.
 
This seems to be a new theme the Editorial Board has been pushing of late. Under its view, the garbage liberal welfare state model is somehow more progressive than the universal social democratic welfare state model. This is wrong as a general matter and especially wrong in this specific case.
 
As Elizabeth Stoker Bruenig pointed out this week at New Republicweak and small means-tested welfare benefits have high administration costs and, because they do not reach most of the people in society, are politically vulnerable and often low quality. The social democratic approach, however, where the benefits are provided to everyone, helps to ensure that everyone (rich and poor) supports the welfare institutions and helps to ensure that the lower classes enjoy the same benefits and social rights as the middle and upper classes.
 
In this specific case, means-tested benefits are particularly nonsensical. What would you do, exactly? Cut off paid leave entitlements at a specific income threshold? Like if you make over $20,000 per year, you don't get any public benefit? Normally you'd try to phase out a means-tested entitlement to avoid imposing high effective marginal tax rates on people, but what would that look like? Would you start out getting 16 weeks at $0 of earned income, but then lose 1 week of entitlement for every $1,000 made over $20,000? That seems kind of odd. Would you phase out benefit levels based on earnings such that those entitled to the benefit on the tail of the phaseout would still receive 16 weeks of paid leave entitlement, but only at $1/week? This would be even more odd.
 
In reality, the D.C. proposal is already progressively structured: it's funded with a progressive tax and pays out earnings-related benefits that have progressive income replacement rates. That progressivity combined with universality is a potent mix for a killer benefit that will also be beloved across all classes, making it nearly invulnerable to future dismantling efforts.
 
Conclusion
 
Despite what the Editorial Board says, paid leave of this sort is not "unprecedented in its magnitude." This would be true if the only country in the world were the United States. But there are actually other countries as well, many of which have much more generous paid leave benefits than even D.C. is offering. At this point, nobody can say for sure that the D.C. plan will be perfect. Due to certain legal quandries, it's taxing mechanism is a little complicated. The D.C. government also may not end up being a competent administrator. But the basic thrust of the plan is very good and the Editorial Board's arguments against it are very bad.
 

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