Negative Income Tax

Extracted from a discussion about minimum wage

2013-06-07

A welfare system can be designed to not interfere with money as an incentive for people to work. However, political processes often produce systems that do not do this very well, or - even worse - actually provide financial incentives for poor people to not get jobs (e.g. by cutting benefits by more than the wages). I do not know what sort of system Spain has.

There have been a few attempts at actually designing a social/economic system based on capitalism that would not let people starve. Of these, the simplest to understand is named the Negative Income Tax (NIT). There is a reason for the name, but understanding it requires more effort than understanding the system itself. In a NIT system, the government regularly mails everyone a check for a minimum income. For example, you might get $1000 a month. Note that everyone gets this, not just poor people. The government then charges a flat income tax rate (e.g. 40%) for everyone on all income. Finally, we abolish all other social assistance programs, such as minimum wage, sales tax credit for low income people, etc. These people now have some money already, and we need to pay for all those monthly handouts somehow. The effects of NIT are:
  1. Everybody has enough money to survive.
  2. All (money-making) work is equally rewarded. This is better than the current system, which typically rewards the first amount little (because of decreasing welfare), the next amount a lot, and the last amount a medium amount (because of higher taxes).
  3. Many complex and divisive tax issues just vanish. For example, income splitting for (married?) couples would no longer have any effect.
  4. Taxes would simple enough that everyone with a calculator could do their own. This would cause a lot of unemployment for accountants, but I'm afraid I don't have much sympathy for them. A simpler tax system would also lower costs for the government (by laying off bureaucrats), we could cut taxes without cutting services.
  5. The numbers can be adjusted so that the average tax burden is about the same as now and falls in about the same places.
  6. Successful businessmen can still get rich through hard work. We don't want to mess with this.
  7. The government wouldn't go broke.
  8. When politicians campaigned on taxes, they would have to say things people actually understood.
I used to believe the Canadian government should try this. After the financial crisis started, I have put the idea on hold. I don't think it is a good idea to try serious economic experiments at the moment. A good world economy acts as a safety net for countries (because it makes it easier for them to recover after removing failed policies), and we don't have one. At the moment, I think the idea is too dangerous.

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