Negative Income Tax
Negative Income Tax
A negative income tax (NIT) provides an income guarantee to families without other sources of income, but taxes away that guarantee as the family’s earnings increase. An NIT is thus usually specified in two parts: (1) the guaranteed income for families with no other income; and (2) the marginal tax rate on earnings. It is a negative tax in the sense that low-income families receive a tax credit from the government rather than paying taxes to the government.
The idea of an NIT is often credited to Milton Friedman and James Tobin, who conceived it in the 1960s as a unified alternative to the complex array of means-tested cash and in-kind assistance programs that were available (and continue to be available) in the United States. They envisioned an NIT that would be administered by the U.S. Treasury as part of the overall tax system, thus eliminating much governmental bureaucracy in providing assistance to low-income families. The NIT was intended to ensure that families had adequate income regardless of their earnings while encouraging work with a lower marginal tax rate than under other means-tested programs.
Versions of the NIT were studied in four large-scale randomized experiments in the United States and one in Canada beginning in 1968. The experiments were conducted because of concerns that the income guarantee would discourage some adults from working and because of concerns about the costs of an NIT. The findings generally confirmed the expectations that higher levels of guaranteed income would reduce work effort and that lower marginal tax rates would encourage work. The results were especially strong among married women. However, the labor supply response in the NIT experiments was modest compared to prior nonexperimental estimates. Perhaps the most surprising result—and one of the most controversial and disputed—was that the NIT encouraged married couples in Seattle and Denver to break up.
Although the NIT in its original form has not become policy, the idea and the randomized experiments inspired a number of similar policy changes and additional randomized experiments. The Earned Income Credit in the United States is similar to the NIT but aims to reduce work disincentives by providing a refundable income tax credit only to families with earnings and by increasing the tax credit with earnings up to a certain point. Two Canadian provinces tested what was essentially an NIT with a work requirement that subsidized only those who worked 30 hours or more per week. Earned income disregards in many welfare and other systems use the NIT’s basic notion that reduced tax rates will encourage work by slowly reducing means-tested benefits when earnings increase. In Germany a Targeted Negative Income Tax has been designed to encourage work among the long-term unemployed.
SEE ALSO Income Maintenance Experiments
Hum, Derek, and Wayne Simpson. 2001. A Guaranteed Annual Income? From Mincome to Millennium. Policy Options (January–February): 78–82.
Munnell, Alice, ed. 1987. Lessons from the Income Maintenance Experiments. Boston: Federal Reserve Bank of Boston.
Negative Income Tax
NEGATIVE INCOME TAX
NEGATIVE INCOME TAX. The economist Milton Friedman coined the term "negative income tax" (NIT) in Capitalism and Freedom (1962). Under an NIT, transfers are based on how far income falls below a "break-even" level. Those with no income receive the maximum payment, but payments fall as income rises up to the break-even point. An NIT makes it possible to subsidize the working poor, without requiring that welfare recipients earn nothing or reducing payments by one dollar for every dollar earned. The NIT was the subject of several federally funded local experiments in the late 1960s and early 1970s, and some welfare programs, including food stamps and supplemental security income, have operated as negative income taxes. However, the earned income tax credit, rather than the NIT, has become the principal subsidy giving the poor an incentive to work.
Killingsworth, Mark R. Labor Supply. New York: Cambridge University Press, 1983.
See alsoTaxation .