Nova workboard

a blog from young economists at Nova SBE

The Negative Income Tax

The Negative Income Tax (NIT) is a progressive tax system according to which people earning below a certain amount would not pay any tax; instead, they would receive supplemental pay from the government. For example, assuming a tax rate of 20% and a threshold of $10.000USD, someone who earns $5.000USD would receive ($10.000-$5.000)x20%=$1.000USD from the government. One of the most important proponents of this theory was Nobel laureate Milton Friedman.

One big advantage of the NIT is the great simplification of the government’s welfare system by eliminating the need for the multitude of government assistance programs (food stamps, the RSI [in Portugal], etc.) currently in place, thus significantly reducing administrative costs related to the upkeep of all these programs. By centralizing government aid in only one program, in addition to the huge reduction in bureaucracy, the state could also reduce fraud because  it would be much easier to keep track of how much money each household is receiving than it is now (the same household may receive government aid from a lot of different programs). Minimum wage thresholds could also be lowered, thereby helping employment in times of crisis, because of the minimum guaranteed income of the NIT.

Additionally, welfare traps put in place by the current assistance programs would also disappear. While, today, several of these programs provide incentives for workers to live on benefits forever (working more sometimes means losing the benefits which means people would rather not work and keep the benefits) the NIT eliminates this predicament: your disposable income always rises with the number of working hours.

Despite being an interesting concept, in my opinion, the NIT is, however, very difficult to implement. First of all, while welfare traps would, as I stated above, disappear, incentives to work are also very bad with the NIT because the program is effectively giving money with no work requirement. The overall cost for the State could also be significantly higher depending on the threshold put in place (which, by the way, would also be difficult to set).

Finally, the NIT would be a radical change to the way things are being done today. People would not respond well to the demise of classical welfare programs and thus it is impossible to politically implement such a scheme. Additionally, economic effects are theorized but the real world is far too unpredictable for such a game-changing idea. That’s why, in my opinion, the Negative Income Tax makes for a very interesting academic exercise but not really for a practical application in the real world.

João Rosa

#527

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Author: studentnovasbe

Master student in Nova Sbe

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