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05 Aug 2007 08:22 pm

The Negative Income Tax [Eric]

A reader:

Eric: The devil's in the details, but both conservative and liberal friends have responded positively to the idea of a VAT, elimination of income tax, and a universal tax rebate that covered necessities. Milton Friedman of course proposed a similar "negative income tax" and Nixon as President actively supported the proposal.

This model could address the regressive taxation problem, and perhaps we could completely eliminate personal income taxes and simultaneously make the process much less complicated for individual citizens if we shifted some of the burden over to corporate, capital gains, and/or estate taxes (given the rights bestowed on corporations as fictional people, I think it's better to tax them than individuals).

I once read Friedman's negative income tax idea a few years ago, and was very briefly smitten with the notion. Then the enormous flaw in it hit me: a minimum guaranteed standard of living really messes with incentives at the bottom of the economic ladder. If you're happy with the check the government is sending you every month, there's no reason to work at all.

You'd end up with a whole mass of people on the low end ceasing to be productive workers and instead just living off the dole. Now that'll really stunt an economy's growth.

Ideally, welfare should exist to be a security net during tough times for people who could normally work, and also to care for people who truly cannot provide for themselves. But one thing it should not be is a permanent way of life for people who could be working otherwise. The negative income tax/universal rebates just creates too many opportunities for that to happen.

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