Why Not A Negative Income Tax With Cash Subsidies To The Poor?

As Republicans in power work to create a strong, affirmative agenda, they would do well to revisit a policy proposal devised by the late Milton Friedman.

Liberals tend to dismiss Friedman, a Nobel Prize-winning economist, as an extremist libertarian and an enemy of any kind of social help. This was always an absurd charge.

In his 1962 book “Capitalism and Freedom,” Friedman acknowledged that some form of welfare was necessary in capitalist societies; the trick was to improve it.

What kind of program could help protect every citizen from destitution without granting excessive power to bureaucrats, creating disincentives to work and clogging up the free-market economy, as the modern welfare state had done? Friedman’s answer was the negative income tax, or NIT.

The NIT is easy to describe. “The basic idea,” Friedman wrote in a 1968 Newsweek column, “is to use the mechanism by which we now collect tax revenue from people with incomes above some minimum level to provide financial assistance to people with incomes below that level.”

Disincentive To Work?

Already, he pointed out, no one pays taxes on the first few thousand dollars of income, thanks to personal exemptions and deductions. Most earners pay a fraction of their “positive taxable income” — that is, the amount by which their earnings exceed that first few thousand dollars.

In Friedman’s plan, the poor would similarly receive a fraction of their “negative taxable income” — the amount by which their earnings fell short of that level. This direct cash grant would replace all other welfare programs for the poor.

But wouldn’t the NIT — in effect, a government-guaranteed income — still be a disincentive to work, just as no-questions-asked welfare benefits were before being reformed in the 1990s?

“Any state intervention, any income redistribution, creates disincentives and distortions,” admits Gary Becker, a University of Chicago economist and Friedman disciple. “But if society decides that a certain level of redistribution must take place, the NIT is the best, the most minimally distorting, solution ever devised.”

To limit the disincentive, Friedman argued, the NIT should be progressive. Say the government drew the income line at $10,000 for a family of four and the NIT was 50%, as most economists recommend. If the family had no income at all, it would receive $5,000 — that is, 50% of the amount by which its income fell short of $10,000.

Smaller Bureaucracy

If the family earned $2,000, it would get $4,000 from the government — again, 50% of its income shortfall — for a total post-tax income of $6,000. Bring in $4,000, and it would receive $3,000, for a total of $7,000. So as the family’s earnings rise, its post-tax income rises, too, preserving the work incentive.

Robert Moffitt, an economist at Johns Hopkins University and a leading authority on the NIT, notes another advantage of the program over other forms of state assistance: “No stigma attaches to the NIT.” Everyone fills out the same forms, and no infantilizing government meddles with a household’s food, shelter and health care, as under the current system.

Yet another NIT advantage is a freer labor market. No minimum wage would be necessary, since a minimum income would now be guaranteed. This would boost employment: as economists recognize, a legal minimum wage tends to increase joblessness by discouraging employers from recruiting unskilled labor.

The NIT would reduce illegal immigration, too. Managed by the IRS, it would apply only to citizens and legal residents, and since it would eliminate welfare programs, aliens would have less incentive to cross the border illegally for government benefits.

But the biggest advantage of the NIT is that it requires the smallest possible bureaucracy to implement. The IRS already exists; it knows how to assess income statements; and, to run the NIT, it has only to take money or pay it out.

No longer would the federal and state governments maintain the sprawling multiple agencies needed to distribute food stamps, public housing, Medicaid, cash welfare, and a myriad of community development programs. Nor would they need to pay the salaries and enormous future pensions of the public employees who run all these programs.

George Shultz — who, before serving as Ronald Reagan’s secretary of state, was chairman of his Economic Policy Advisory Board, where Friedman was a major intellectual force — calls the NIT “a brilliant and unworkable idea.” Among the reasons why: “Most Americans believe that nonworking welfare recipients should get programs and not cash,” and “the bureaucrats who manage the current welfare state like the power it grants them.”

Opposition To Statism

Another former Reagan adviser, Martin Anderson — now, like Shultz, a fellow at the Hoover Institution at Stanford — fears that an NIT would simply be added to, rather than replace, existing programs; politicians are better at piling on benefits than at re-engineering the state, he points out.

Shultz and Anderson may be right. But in the current era of vociferous and growing opposition to excessive statism, the NIT could have new appeal. With governments at the state and local levels risking default because of unsustainable debt, all government interventions could be up for rethinking in the years ahead.

“If conservatives really want to return to power and get the American people to embrace change, they need to go beyond negativity and refocus the political debate on bold ideas,” Becker says. “And the negative income tax is the best we have.”

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily