What Is Negative Income Tax?
Let me explain negative income tax, or NIT, to you directly. It's an alternative to traditional welfare that was proposed by economist Milton Friedman in his 1962 book Capitalism and Freedom, among others. As someone looking into this, you should know that NIT supporters argue every American without income above the tax liability threshold deserves a basic income guarantee. They say NIT subsidizes the needy more cheaply than the current welfare system.
Negative Income Tax Explained
Here's how it works: to receive a negative income tax subsidy, those in need would file income tax returns just like everyone else. The IRS's computerized system would then quickly and objectively spot taxpayers with income below the threshold and mark them as eligible for help.
Proponents see NIT as a mirror image of our existing tax system. For taxpayers above the threshold, tax liabilities increase with income based on a tax rate schedule—that's positive taxes, paid in cash as the difference. For those below, benefits decrease as income rises according to a negative tax rate or benefit-reduction schedule, and they receive NIT refundable credits in cash as the difference, which we call negative taxes.
Concerns from NIT Opponents
Opponents, drawing on labor-supply economic theories, worry that NIT's promise of a threshold income guarantee could lead the working poor to work less or quit altogether. They might choose leisure over work since wages would reduce the guarantee but not exceed it, especially after payroll, state, and local taxes. If too many working poor give in to this income effect and substitution effect, the number of people below the threshold and eligible for NIT credits would swell, making the total costs of negative income tax untenable.
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