The Value of the Negative Income Tax

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With the arrival of the end of the year, everyone is starting to think about how much they made and how they are going to go about paying their taxes.

Unfortunately, it is one of those things we are forced to deal with for the unforeseeable future — at least until those libertarian folks get around to abolishing the federal government.

Every year when I am fumbling my way through TurboTax, it gets me thinking about tax policies, and I wanted to bring up a tax reform proposal that I have always found interesting.

That idea is the negative income tax or, if you prefer, a guaranteed minimum income — the former is better when talking to conservatives and the latter for progressives.

The negative income tax is an idea suggested by Nobel Prize winning economist and free market hero Milton Friedman. It was kicked around as an idea during the Nixon administration, but ended up being morphed by political pressure into another program. The general idea of the negative income tax is to help the nation’s poor by giving them exactly what they need — money — and eliminating many of the bureaucracies that make up our welfare system.

Under a negative income tax, every person in the country would file tax returns regardless of employment status. The government would set a guaranteed income for every adult in America, which for the sake of easy math, let’s set at $10,000. The tax plan would be accompanied by a 25 percent flat tax — all numbers are adjustable of course, but these make the math easier.

So let’s say someone works and makes $5,000 one year — they would pay $1,250 in taxes, but still receive their $10,000 minimum income, so for the year that individual would net $13,750.

If someone made $40,000 in a year, they would pay $10,000 in taxes and receive the $10,000 minimum income, so they would essentially break even at $40,000.

Now if someone made $100,000, they would pay $25,000 in taxes, get the minimum income and come out netting $85,000 for the year.

The negative income tax is appealing for several reasons.

The first is that it takes away disincentives for working. Under our current welfare programs we often have cliffs for certain benefits that people become ineligible for when they start making too much money. This leads to many people who are attempting to get off of welfare programs to get caught in a cycle of yo-yoing on and off of the programs instead of finding a stable path to self-sufficiency.

Under a negative income tax there is never a penalty for taking a better job, working a little longer, or picking up new skills.

By giving the poor a guaranteed income we could eliminate the bureaucratic nightmare that is our nation’s welfare programs.

Instead of multiple different programs with their own silos of money separated from each other, people would simply receive a check in the mail. The government wouldn’t have to spend money tracking down welfare fraudsters or staffing bureaucracies. If people should still need assistance even after receiving their guaranteed income, it could first be addressed by private charities, and should they be lacking, with local government programs.

A guaranteed minimum income would also be a boon for wages.

By taking away the desperation factor of the labor supply, employers would feel pressure to offer their employees better wages and benefits.

One of the downsides is the possibility of a rise in prices as a result of people receiving a guaranteed income, and that is a legitimate concern.  Additionally there is the moral hazard of giving people money in exchange for nothing.  If you are like me meaningful work is an essential part of being a happy and fulfilled human being — no plan is perfect.

In the end, however, this plan should have a certain appeal across the political spectrum.

Conservatives can get behind the idea because it brings in an aspect of the flat tax, simplifies the tax code and diminishes the need for state run welfare system.

Progressives can get behind it because the minimum needs of every single person are met and big wigs at the top cannot exploit tax loopholes to avoid paying their part.

It may not be a perfect solution to the problems of our tax and welfare system, and I am sure there are a number of factors that I have not even considered, but we have to come to terms with the fact that no silver bullet exists.

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