Negative income tax

In economics, a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government.

Such a system has been discussed by economists but never fully implemented. It was described by British politician Juliet Rhys-Williams in the 1940s and later by United States free-market economist Milton Friedman.

Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.

In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.

A negative income tax is intended to create a single system that would not only pay for government, but would also fulfill the social goal of making sure that there was a minimum level of income for all. It is theorized that, with an NIT, the need for minimum wage, food stamps, welfare, social security programs and other government assistance programs could be eliminated, thus reducing the administrative effort and cost to a fraction of what it is under the current system, as well as eliminating the perverse incentives created by these overlapping aid programs, e.g. when a minimum wage worker who earns a little more nets out with less income because they are newly ineligible for aid. Theoretically, the worker would then be stuck in a welfare trap and would have no incentive to seek higher wages.

A NIT does not disrupt low-wage markets, whereas a minimum wage law makes certain that people whose skills are not sufficient to justify that kind of wage will go unemployed. A NIT would therefore increase the availability of cheap labor, which would enable businesses to do domestically some of the work which they would otherwise have to outsource to other countries.

A NIT could reduce administrative overhead, since the large bureaucracies responsible for administering taxation and welfare systems, with the multitude of rules, thresholds and different applications required, could be greatly reduced or eliminated. The savings from this could then be returned to the people through spending on different government activities, via tax cuts, or any array of different ways.

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