Negative income tax

In economics, a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive an income supplement from the government instead of paying taxes to the government. It was advocated by United States economist Milton Friedman.

In a negative income tax system, people earning a certain income level would owe no taxes, those earning more than that would income tax and those below would receive an income payment.

Negative income tax is intended to create a single system that would pay for government and make sure that there was a minimum level of income for all. In theory NIT eliminates the need for a minimum wage, food stamps, social security and other government assistance, thus reducing administration costs as well as poverty traps, for example when a minimum wage worker earns a little more and has less income because he is newly ineligible for aid.

One model (based on Milton Friedman’s) is to set the individual income level at £6,000 a year and the tax rate at 40%. In this example, which is only for example’s sake, an individual’s earnings, tax and overall income would look like this:

£ earnings per year	tax at 40%	net earnings	universal benefit	total income	net tax rate
zero	zero	zero	6000	6000	-100%
5000	-2000	3000	6000	9000	-80%
10000	-4000	6000	6000	12000	-20%
20000	-8000	12000	6000	18000	10%
30000	-12000	18000	6000	24000	20%
50000	-20000	30000	6000	36000	28%
100000	-40000	60000	6000	66000	34%
500000	-200000	300000	6000	306000	38.8%

This looks fine for single individuals, but it all depends on where you set the poverty line and whether the £6000 a year in this case would apply to a family of four, which would be £24000 a year in all.

Friedman feared that high NIT rates would lessen the incentive to take employment. He opposed introducing the negative income tax as an addition to existing benefits as this would only worsen the problem of bureaucracy and waste. He preferred to have no income tax at all, but did not think it was politically feasible to eliminate it, so he suggested NIT as a less harmful income tax scheme.