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In economics, a negative income tax (abbreviated NIT) is a method of tax reform that has been discussed among economists but never fully implemented. It was developed by Juliet Rhys-Williams in the 1940s and later by United States economist Milton Friedman in 1962. Negative income taxes can implement or supplement a guaranteed minimum income system. Face-to-face trading interactions among on the New York Stock Exchange trading floor Economics, as a social science, studies the production, distribution, and consumption of commodities. ...
A tax (also known as a duty) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ...
Lady Juliet Rhys Williams, 1898-1964, began her political career as private secretary to the Director of Training and Staff Duties at the Admiralty in 1918, becoming private secretary to the Parliamentary Secretary, Ministry of Transport, 1919-1920. ...
The 1940s decade ran from 1940 to 1949. ...
Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist who made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics while advocating laissez-faire capitalism. ...
1962 (MCMLXII) was a common year starting on Monday (the link is to a full 1962 calendar). ...
A guaranteed minimum income is a proposed system of income redistribution that would give each citizen a certain sum of money independent of whether they work or not. ...
A negative income tax would replace the current progressive income tax system used throughout most of the Western world. This would be replaced by a flat tax of, say, 25%, but each taxpayer would also be given $10,000 by the government. Thus a person earning only $4000 per year would pay $1000 in taxes, but overall would receive a net gain of $9,000 from the government. A person making $40,000 would be at the break-even point and would neither pay taxes nor receive any benefits. A person making $1,000,000 per year would pay close to the full 25% tax, as the $10,000 would count little towards relieving the tax burden. A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ...
A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ...
Specific models
Milton Friedman proposed a model in which a specified proportion of unused deductions or allowances would be refunded to the taxpayer. If, for a family of four the amount of allowances came out to $10,000, and the subsidy rate was 50% (the rate recommended by Friedman), and the family earned $6,000, the family would receive $2,000, because it left $4,000 of allowances unused, and therefore qualifies for $2,000, half that amount. Friedman feared high subsidy rates as those would lessen the incentive to obtain employment. He also warned that the negative income tax as an addition to the "ragbag" of welfare and assistance programs, would only worsen the problem of bureaucracy and waste. Instead, the negative income tax must gradually replace all other welfare and assistance programs. The negative income tax has come up in one form or another in Congress, but Friedman opposed it because it came packaged with other undesirable elements antithetical to the efficacy of the negative income tax. Source: Free to Choose. Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist who made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics while advocating laissez-faire capitalism. ...
Free to Choose is both a book (ISBN 0156334607) and a ten-part television series. ...
Proponents The proponents of negative income tax believe that its implementation would solve several problems with current systems. For example, they believe it would eliminate the welfare trap and the minimum wage. Furthermore, they believe it would reduce administrative overhead, since the large bureaucracies responsible for the current hodge-podge of support services could be eliminated. Since the administrative overhead would be reduced, proponents claim, the payout to recipients could be increased, without increasing taxes. Also a positive influence on the economic "boom and bust" scenario might be expected. The welfare trap is a name for a situation in which taxation and welfare systems create strong incentives for people to stay on social welfare payments. ...
The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as opposed to wages that are determined by the forces of supply and demand in a free market. ...
Critics Its main drawback is the same as in almost any income-based tax system: it requires considerable reporting and supervision in order to avoid fraud. In fact, the incentive to commit fraud may be increased with an NIT since the monetary reward for fraud could be larger than a taxpayer's total tax liability. Critics claim that the added expense of policing fraud would more than offset the reduction in administration resulting from the cancellation of current welfare services.
Another criticism is that the NIT might reduce the incentive to work, since recipients of the NIT would receive a guaranteed minimum wage in the absence of employment.
Flat Tax with Negative Income Tax The effort for reporting and supervision can be very significantly reduced. A flat rate income taxation with tax exemption implements a negative income tax as well as it maintains an actual tax rate progression at extremely low administrative cost: This is achieved by paying a tax on the tax exemption to all taxpayers, e.g. in monthly payments. The tax on the tax exemption is computed by applying the nominal flat tax rate to the exemption. The tax on the income is drawn directly from the source, e.g. from an employer. The tax on income is computed by applying the nominal flat tax rate to the income. A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ...
A tax exemption is an exemption to the tax law of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone. ...
This simple method results in an effective progressive rate taxation (although the tax rate for the taxes drawn at the source is flat) which is positive once the income exeeds the tax exemption. If, however, the income is less than the tax exemption, the effective progressive rate actually becomes negative without any involvement by any tax authority. As for the positive progression, only very high incomes would lead to an actual tax rate which is close to the nominal flat tax rate.
The tax on tax exemption also can be understood as a tax credit, which is paid back once an income has reached the level of the tax exemption. This level marks the point where paid taxes and the tax credit are equal. Above that point the state earns taxes from the taxpayer. Below that point the state pays taxes to the taxpayer. Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ...
Flat tax implementations without the provision of a negative income tax actually need an additional effort in order to avoid negative taxation. For such a tax, the exemption only can be paid after knowing the earned income. Flat tax implementations with negative income tax allow to pay the tax on the tax exemption independent of the amount of the actual income.
Guaranteed minimum income A negative income tax can be, but is not necessarily, a guaranteed minimum income (GMI; also known as a basic income). A GMI has to provide enough money to survive on; a NIT could be as low as few hundred dollars and a 2% tax rate implemented by a city government. GMI systems also often have other major reforms, such as the elimination of the minimum wage and the ending of most current social welfare programs. A guaranteed minimum income is a proposed system of income redistribution that would give each citizen a certain sum of money independent of whether they work or not. ...
Implementation While the notion has long been popular in some circles, its implementation has never been politically feasible. This is partly because of the very complex and entrenched nature of most countries' current tax codes: they would have to be rewritten under any NIT system. However, some countries have seen the introduction of refundable (or non-wastable) tax credits which can be paid even when there is no tax liability to be offset, such as the Earned Income Tax Credit in the United States and working tax credit in the UK. Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ...
The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. ...
// Working tax credit Working tax credit, or WTC, is a component of the current tax credits system in the United Kingdom - the related component being the Child tax credit, or CTC - which have both been in their current form since April 2003. ...
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