Negative Income Tax -- good idea?

Great Debates
1

As part of a Pit discussion, I brought up the idea of the negative income tax.

The essential concept is that one does away with welfare, subsidies to the poor, social security, minimum wage, and essentially all of the social safety net programs and replaces them with a single set of rules:

A minimum income per household is fixed by some reasonable means, generally associated with but somewhat above the poverty level and adjusted by family size.

Any income above that minimum is taxed as “normal”.
Any household making exactly that minimum is not taxed.
Any household making below that minimum is given credits in the form of direct cash payouts from the government.

The most commonly seen proposal for implementation of this is Milton Friedman’s, which has those payouts equal to half of the difference between the household’s actual income and the minimum–for example, a household of one (poverty level approximately $11,000 in 2011 in the US according to HHS) that makes $6000 in income is given a tax credit of $2500 at tax time. If that same person is the sole breadwinner in a family of four (2011 poverty level approximately $22,000), the family gets an $8000 tax credit. This was seen by Milton as an acceptable way of removing perverse incentives–every dollar you earn results in more money in your pocket on a yearly basis, no matter your income level, so you always have financial incentive to work more.

Would this be a workable plan? Would it be an effective means of cutting the (administrative) cost of social welfare in the US while delivering similar results?

2

Question from the other thread:

If you choose not to work, you get enough cash to not starve. The difference between this and welfare as currently implemented is that every hour you work is guaranteed to improve your financial situation–there is never a point where you work harder and have less money (because you pushed past the eligibility line for some subsidy or program).

3

Sure it is, but the Pubbies will shriek themselves hoarse and tear off their respective genitals with their bare hands before they let such a thing happen. An entertaining prospect, to be sure, but…sadly, no.

4

This plan will encounter the same problems that current social assistance programs suffer from, which is that they always manage to create a threshold level that will discourage work, and thereby increase dependence.

It’s hard to put this into a more eloquent point, but right now in the US a low income person does very well earning less than about $26k*. They are earning income, but also qualifying for a lot of assistance programs. The nature of those programs is to have hard cut offs, ie you get free sneakers if you earn less than $26k, and nothing if you earn more. And there are a ton of separate little programs such that a person making less than that threshold can also get socks, pants, hats, etc. All together that totals a lot of extra income.

After that threshold, they get nothing. So the person that works a bit harder and earns $27k is cut off and has to buy their own sneakers and what not. So a person below $26k ends up with an effective income of $35k, but a person making $27k feels like they’re making closer to $20k by the time they pay for all the stuff the other guy got for free.

If we were to apply engineering principles to this, we’d take a single person making zero and test this up to $40k, and look at their effective income. Note that I said “effective” income, because a if I can stay home and make $20k a year, or go and bust must ass in a warehouse to make $20k, the effective incomes are not the same.

After doing that, we’ll have to run it through for a single person with 1 through 10 children, again looking to see if there is a point where having 3 kids gives you more or less effective income than 4. But more importantly we need to go through all of that for married filing jointly. Because right now the system actually discourages marriage. The combined income of two people making $20k can disqualify them from important benefits.

The real problem with all of this is that to be fair you set the minimum payment to be more than poverty. But a lot of people work really hard to make barely more than that. So what should they work?

If you system then rewards them for work, such that they’d make more than just their salary, you’ll discourage more work. People will be incentivised towards a certain “sweet spot” hourly wage, where you get the most government money for the least amount of work.

My 2 cents for what it’s worth.

*This number varies widely depending on the individual and location.

5

As an example, if we said the poverty line was $14k a year for a single person, that would be the guaranteed minimum.

But if a person makes $6.50 an hour they’ll only earn $13k a year, meaning they’re worse off working. You said your system would then reward them by giving them extra, how much more?

If we said they’ll end up with a guaranteed $14k, it means they are effectively working for $7/hour, but what is their incentive to work if they could just stay home and make the same?

Next, consider someone that works a bit harder and earns $7.50 per hour bringing home about $15k per year, does he also kept a bump in his salary? Right now he’s working way harder than they guy making $6.50 but only earning a small amount more.

6

Why do you equate higher pay to working harder? I thought the free market folks would understand that you get paid based on the value of your skill, not the amount of effort or work you put forth.

7

Oops, I forgot this was Great Debate, so let me add, uh, purple monkey dishwasher!

There, happy now?

8

I can’t see how this wouldn’t be vastly abused. If you do nothing, you get the minimum. If you work a full time job all year and barely earn the minimum, you get the minimum. Unless this minimum were low enough that it was truly the minimum; if it were truly the minimum, there would be no cell phones, no air conditioning, no car, no entertainment, etc. I can’t see that happening. I can see a lot of people claiming they don’t work, or make peanuts, getting the minimum, and having a black market or under the table job.

9

I’m confused.

I think, if I’m reading the OP correctly, the suggestion is as follows:

I don’t work at all. I get $7k (1/2 the distance to the 14k poverty level). Total income: $7k.

I earn $8k a year. I get $3k. Total income: $11k.

I earn $12k a year. I get $1k. Total income: $13k.

I earn $14k a year. I get nothing. Total income: 14k.

I earn above 14k. I start to get taxed on my income.

So, there is never a point at which ‘effective’ income is greater on this sort of welfare/tax credit system while earning less money from an actual job.

10

You didn’t read the OP carefully. A person who does no work gets some fraction of the poverty line. Friedman proposed “half the difference” (which is a bit harsh, IMHO.) but let’s say it’s a more reasonable 75%–I don’t mind if people who don’t work at all are below the poverty line.

So a person who does no work with a 14k poverty line gets a credit of $10,500 and pays no federal taxes.

A person who works enough to make $13k gets a credit of $750 and a total income of $13,750, and pays no federal taxes.

A person who works enough to make $15k gets no credit, and pays federal income tax on $1000, making his effective income in the range of $15,900.

At every point on the curve, more work equals more cash in pocket. Adjust the two figures (of “minimum income for the negative tax to kick in” and “percentage of allowances credited”) to your satisfaction.

Yes, the ramp is somewhat steep there in that the effective wage earned by the very-low-income is lowered (from a certain point of view), but at the poverty line the marginal value of a dollar is high–$1000 a year is the difference between “no car” and “car that runs, and some insurance”, for example.

11

Didn’t your whole argument boil down to “People who work harder get screwed”? And then went about demonstrating that those who made more weren’t getting the same benefit and then jumping to the conclusion that those who made more worked harder and therefore, those who worked harder were getting screwed… It’s a leap of logic that kind of breaks the argument.

12

The “minimum” is set at or near the federal poverty line, which (based on my own experiences living at or near the federal poverty line) allows for some basic luxuries (a used car, OR a cell phone, OR whatever).

How is that any different than the under-the-table payments made to people who are doing it to avoid losing welfare now?

13

You’re right, I missed the “half the distance” part. But the ‘effective’ income is more than just the money you get at the end of the week.

Consider the $8k vs the $14k, and pretend they both earn $10 per hour. The first guy works 15 hours per week, the other guy 27. So working an extra 12 hours per week only earned him an additional $3000 per year. If I did my math correctly the second guy only earned $4.80 per hour for the additional 12 hours per week.

Next consider that you start taxing a person after $14k, and let’s make the number 10% for simplicity. A guy that works 40 hours per week at $10 per hour earns $20k per year, meaning he has $18k after taxes. He’s working 25 hours more per week to make an additional $7k per year, meaning he’s paid $10 an hour for the first 15, then $5.40 per hour for the next 25.

If I have time tonight I’ll graph it out in Excel. The point I’m trying to get at is that this sort of system has a way of actually being punitive to those trying to earn more. Why bother working an additional hour if it means so little? Would you work an additional hour if each subsequent hour paid less?

14

Can you be on “welfare” and not work at all for long periods of time? I really don’t know.

15

My understanding is that you “merely” have to satisfy your case officer that you are actively seeking a job, and take the advice s/he gives you regarding things like “go down to the job center and put in five applications this week”.

My understanding may be out of date. The beauty of the negative income tax system is that bureaucracy of enforcement just goes away–we don’t care if people are lazy, because no one who is capable of making more money is going to be satisfied with living at the poverty line for any length of time IMHO. I’m as lazy as they come, but if this system were in place I wouldn’t quit my day job, even if I were still making 15k or 20k.

16

You’re right, I didn’t read it that closely, but the liberal side of me couldn’t figure out why we’d want a welfare system that ends up paying people well below the stated poverty line.

Trying my math again: At $10/hour the first guy works 25 hours per week to end up with $13,750.

At the same wage the second guy works 29 hours to bring home $14,900 after taxes.

He worked 4 hours more per week to make $1,150 more. That works out to $5.52 per hour for each hour after 25 that he works. To me that’s a disincentive to work more. He’s better off stopping at 25 hours where his effective wage is actually $10.60/hour.

It’s true that working more gets him more cash, but is it worth it if each subsequent hour is only worth half?

17

But the alternative is not working that hour and making nothing, so that’s pretty good incentive to work. I don’t see how that’s punitive.

18

If working overtime paid half the regular wage, would you still do it?

19

Salaried people work overtime for zilch (and the promise of non-salary rewards) every day, after all.

And if I was at a point in my life where $100 a month extra meant meaningful luxuries (eating out once and a new video game, or a toy for my kids, or the insurance payment and gas to keep my car running), that calculus would be a LOT different than it is for someone for whom that $100 means eating out 15 instead of 14 times.

20

There’s not really a requirement that we set the “minimum” exactly at the poverty line–it’s just a convenient starting point. As I said, that is one of the two variables we can adjust if you think the basic concept is a workable idea.

Well, that’s a question of marginal value at that point. That’s just about $100 a month–and if that $100 a month is the difference between “I have a car” and “I do not have a car”–which at that income it might well be!–then it might be worth it. Then you have a car, and maybe you can get that $15/hr assistant manager job in the McDonalds in the next town over, and Bob’s your uncle.

Also, not letting the perfect be the enemy of the good, it’s more worth it than it would be to work those hours under the current system.

I should note **emacknight **has said in other threads that he considers himself essentially a full-time devil’s advocate. Color your responses to him accordingly.