The Negative Income Tax (NIT) is an idea that I think has some real merit, but I’ve never seen it discussed on the boards. The NIT seems to be a good general solution to some of the debates about welfare that exist between the political left and right, by greatly simplifying the welfare system (and the income tax system) and providing everyone with a social safety net. The main question of this thread is: Would you accept a NIT system? If yes, on what conditions (tax rate, break-even point, subsidy amount)? If no, why not?
Here’s a quick description of the idea from Wikipedia:
The article in Wikipedia goes into a little more depth, but that’s the mechanics of the idea. I have a couple thoughts of my own regarding the idea: [ul]
[li]The article says it is a flat tax, but it doesn’t have to be. The most likely split between two brackets would be below the break-even point and above. For example, if the tax was 33% in the lower bracket, the break even point would be about $30,000.[/li][li]Because the tax rate is less than 100%, it is impossible to lose more money through reduced welfare and increased taxes than is gained by working. There is no welfare trap.[/li][li]The article mentions the cost of the infrastructure required for an income tax system as a negative point. However, we have much of that already in place. The point of the NIT is to use it as the only welfare delivery system. Because of this, the NIT would likely be cheaper to operate than our current system.[/li][li]If the NIT is to be the only source of welfare, it will probably also need to function as a guaranteed minimum income in order to be adopted. The $10,000 figure given in the article is slightly less than a full time, minimum wage job. This could be a good starting figure, perhaps factoring in the cost of living in different parts of the country.[/li][li]The NIT eliminates the minimum wage. It has been speculated that the NIT might entice some employers to pay wages below what they otherwise would. This might not be totally negative–the lower wages could lower the cost of living.[/li][li]On the other hand, the lack of a minimum wage might also increase the number of jobs available.[/li][li]I expect there would be some resistance to the idea of giving the poor money, rather than food stamps or something similar. This might manifest itself as objections to “subsidizing drug use” or something similar. Are these fears justified, and will this provide a significant threat to the NIT?[/li][/ul]
I think that’s about all the point I have to make. What does the Dope think?
The point is that everybody is on that gravy train: one works hard to accrue more wealth only if one considers $10k pa to be too little (which, I suggest, is the vast majority.)
$10,000 (or some similar sum) is not a lot of money to live off for a year - one would have to be extremely frugal to live solely upon it, as indeed I argued here. If a democracy decides that people ought not suffer serious conditions such as starvation, exposure or cancer through simple poverty in a land of plenty, this proposal would cut a great deal of bureacracy. If enough people believe that some preventable suffering is justified in order to motivate people to work, that democratic mandate will not be acheived.
As for the drug aspect, it seems to me that it is the prohibitive price which turns simple poverty into debt-ridden desperation. If the daily hit costs $5 in a safe environment rather than $100 from a dubious source, whither that desperation? Legalise all drugs.
The problem with this idea is it’s really trying to fix a non-problem. The reason the tax code is so complex is not because of the progressive nature of the income tax, but because of deductions, credits and other complications. People will still want their deductions in this new scheme so the tax code will not be any simpler than it already is. Also the complexities of welfare arise from the fact that welfare is based on individual cases. Does an under-employed bohemian living in genteel poverty really deserve the same assistance as a struggling single mother? I think not.
I don’t think this is a horrible idea in itself. I just think it doesn’t offer any advantages to the current system.
Who would qualify for this $10K? Specifically, would infants qualify?
If the cost of maintaining a family of 4 is less than $10,000 more than the cost of maintaining a family of 3, then there’s a weird incentive going on here.
True. If the tax code is going to be cleaned it, it needs to have very few deductions, low rates, and stay that way. I probably shouldn’t have put that in my OP, seeing as it’s tangential to the thread topic itself.
But the complexities also create more inefficiency, giving you less welfare-bang for your tax buck. The needs of the individuals cannot be completely ignored–provisions for family size, for example, would have to be worked into the system–but moving in that general direction would do more good than harm.
I don’t know who exactly would be included in a functioning system, but we could make a couple guesses. Adults and emancipated minors would certainly be involved. I’m not sure how the system would work for working dependents (minors). As mentioned above, provisions for family size would be likely be included in the tax structure. I don’t have any data commenting on exactly how much should be supplied, but this thread is primarily for discussion of the concept, rather than the exact details of implementation.
It seems like the basic problem with a negative income tax is that the benefit goes to everybody equally, no matter what their assets or skills or needs might be. It might be possible for someone to have a low income this year but have a fully paid- for house, a stock portfolio or other substantial assets, or might have the education and skills to earn a good income but choose instead to, say, drive a cab part-time while he writes his Great American Novel. Someone could have zero income and live on vast savings if he was dumb enough not to invest them properly. Even college students from rich families would qualify based on their own low incomes.
People who are desperately, helplessly poor and people who choose temporarily to live cheaply need to be treated differently.
What would make more sense would be a flat tax with *no * itemized deductions and a substantial standard deduction. Suppose everyone paid, say, 20% on everything above, say, $35,000 for a family of four. People who earn less would pay no tax. People who earned $50,000 would pay 20% of $15,000. And so on up the income ladder. The minimum amount of money needed for basic support wouldn’t be taxed at all. After that, if you earn twice as much as somebody else, you pay twice as much tax. If you earn 20 times more, you pay 20 times more tax. Seems fair to me.
With that system in place, you operate a welfare system based on need that would emphasize education and job training, and provide child care and transportation as necessary.
Let’s be honest; how many people would, upon receiving a check for at least $10,000 after maybe several years of being poor, would wisely invest or put away that money and carefully parse it out according to a strict and thrifty budget? I’m not saying all welfare recipients would buy hookers and blow, I just don’t see $10,000 lasting many people an entire year. And mailing or depositing the money monthly seems like a very intricate proposition.
And when there’s too much year at the end of their money, and the kids are hungry and they’re being evicted, then what? Too bad, you already got your welfare for this year?
Huh. Never seen the negative income tax expressed that way. Usually there is 1) a base minimum, and 2) a depreciation rate. Say the depreciation rate is 50%. You have no job, you get 10K. You find a job, and that gets you, say, $5000 a year. You lose 50% of that 5K in benefits, so your total income is now
(10,000-2,500) + 5,000 = 12,500.
If you make 10,000, you lose 50% of that in benefits, or 5K. So your base income is now 15,000.
Presumably, any dollar over 20,000 is taxed, probably in a progressive scheme but of course the NIT doesn’t require this.
What I think is great about this plan is the simple (simplistic?) notion that you will never lose any income or services by working. Working always earns you more money, always. Under other welfare schemes, there is usually a point where the loss of goods and services provided are not offset by the income made.
I’ve always liked the idea. I think the problem is in setting a depreciation rate and a base income means that some portion of the economy is never paying any taxes. Maybe a person making 20K a year shouldn’t be paying any. But trying to find a democratically acceptable balance between the base salary and the depreciation rate would probably be tough to do.
First, you run into all the problems of a flat tax. So, for example, ythe government and people lose the ability to influence the way individuals spend their money. The government and people currently do this by providing economic incentives for spending your money “good” ways, and economic disincentives for spending it in “bad” ways. So, for example, the US government allows you to offset charitable donations against your income, but only allows you to offset your gambling losses against your gambling winnings. Thus, the government encourages people to give their money to charity, rather than gambling it away.
And your proposal increases the tax rates on the lowest income brackets. Presumably, this would force them to pay higher amounts of taxes. By changing the highest income tax rates to 25% (as opposed to the current highest rate of 35%) you’re effectively lowering the tax rates on the richest Americans. Thus, the government wouldn’t be bringing in as much money from the richest Americans. So if we set the level for everyone at whatever number would bring in the same amount of money to the US government, it will end up coming from individuals in the lowest tax brackets.
Second, the government loses the ability to specifically target needs in the system. By giving people food stamps, the government makes sure that it’s providing a certain benefit (food) to those that need it (those without money to afford enough food). By providing people with Medicare, the government makes sure that it’s providing a certain benefit (medical care) to those that need it (sick people). If you just cut everyone a check for $10K, then you’re not going to be targetting that money to those most in need.
Third, the government loses the efficiencies potentially created by providing services in bulk and on a non-profit basis. For example, it’s cheaper to cook a ton of soup in a single vat and pass it out to all the homeless, than it is to give everyone money to buy individual cups of soup from McDonald’s.
Fourth, there would seem to be some practical problems with just handing people a check for $10,000. For example, the homeless would seem to be the least likely to file tax returns. Thus, the homeless would seem to get no benefits. And even it the homeless do file tax returns, where does the government mail their checks? And where do the homeless cash those checks?
Similarly, most homeless people are thought to suffer from mental illness and/or other mental deficiencies. So it seems unlikely that a mentally ill homeless person could responsibly budget his/her $10,000 to last them an entire year.
And what do you do with a person who lost his job in February 2005? That person is not going to file a tax return until April 2006, and presumably wouldn’t receive a check until sometime after that. By doing away with welfare except through a check delivered once per year, you’re hindering the government’s ability to address people’s needs as they arise.
And how would you treat marriage and children under this system? Does everybody file separately? If not, do you give couples $20K? And do you get more if you’ve got children?
Ok, I’m going to try to hit all the main points that have been made so far.
I can’t imagine that charitable deductions would be left out of the system. While the government might lose some ability to influence how money is spent, there will also be many fewer loopholes in the tax code that allow people to get away with paying less than what they might be paying under a flat tax system. Overall, I would say the benefits outweigh the costs.
Lower income brackets pay more tax? Using the numbers given by the article, those who would be making the equivalent to the current minimum wage would paying a -40% income tax. The effect of the NIT is to make the grading of the income tax much more gradual than it is right now. Again, using the Wikipedia numbers: anyone making $40,000 would pay 0% income tax, $50,000 would pay 5%, $100,000 would pay 15%. The actual dollar and percent figures used can be played with, but the NIT is naturally progressive.
Why are food stamps superior to money? Being given currency allows more flexibility on exactly how each person’s welfare is spent. By giving everyone the check (which many will pay back with taxes), you ensure that those who need it most do get it.
Is there any reason this couldn’t be done privately? If charities don’t do it, it would probably be a good idea for many welfare recipients to get together and make their own soup in bulk. It would sure be a lot less expensive than McDonald’s.
No tax return = no check. If a year’s worth of income doesn’t inspire people to fill out a short form, I don’t know what will. For the homeless, personal pickup of the check (and cashing the check) could be made available to them at the local IRS office, City Hall or wherever. I see no reason why it would be unfeasible to offer monthly check pickup.
This is a problem that cannot be dealt with by the NIT alone. The NIT assumes that people are able to rationally spend the money given to them. People with disabilities that make them unable to do this require a different system.
That person should call up the IRS and say, “Hey, I lost my job, I need some money for welfare.” Allowing checks to be given out monthly would allow this situation to be addressed.
We would have to give couples double the amount given to a single person. Doing otherwise would simply offer incentive for the couples to file separately. It would probably be necessary to give more for children. I don’t have a dollar figure to offer, but I’m sure some reasonable balance can be found.
erislover, I don’t seen any qualitative difference between what you describe and what’s described in the article. Unless you’re referring to something within my OP. If that’s the case, please clarify.
trublmakr, I think I answered your questions in responce to Age Quod Agis’s post. I agree that mailing the checks out yearly is probably not a workable idea, though I don’t believe doing it monthly to those who need it would be unworkable.
This flaw in the current system might be alleviated if the income threshold for qualifying for Medicaid benefits were higher, and/or a provision was made to give medical benefits to all children who do not have insurance through their parents’ work. I don’t have a cite at all, but I suspect that many parents in the “welfare” system continue to squeak by on a very low income so that their children can have medical insurance, because often the only jobs they can get that lift them above the Medicaid threshold do not provide medical benefits.
Of course, this is why I don’t usually post in Great Debates. Now I want to research the issue and write a thesis. It’s going to bother me and probably many other people that there is no cite, but oh well. I’ve seen the scenario happen a dozen times. Because of the medical issue with kids, (and also with chronically ill adults) it is, paradoxically, sometimes not economically feasible to get a better job.
If anyone is interested in any of the details, I’ve been playing with some numbers to see what I could get. A couple formulas I used: (I = yearly income, T = tax rate, B = base income)
The total tax someone pays: IT - B
The effective tax rate: (IT - B)/I
Break Even Point: B/T
I tried to find a setup that would match the current income tax brackets as close as possible, I found that B = $12,000 and T = 36% comes very close in the upper income ranges. The effective tax rate under the NIT is noticably lower for everyone making below about $75,000. After that, the tax rates of the NIT stay very close to the rates under the current system. This calculation did not factor in the effect of removing many of the possible deductions and loopholes from the system. Depending on how big of a factor that is, the revenue created by the NIT could be more or less than that created by the current system.