November 15, 2013


Why Not a Negative Income Tax? : Replace the welfare state with a cash subsidy for the poor. (Guy Sorman, Winter 2011, City Journal)

In his 1962 book Capitalism and Freedom, Friedman acknowledged that some form of welfare was necessary in capitalist societies and that the state would likely play a role in its provision. The trick was to imagine a very different, radically improved, and more efficient form of welfare--what Friedman's son, David, also an economist, calls "libertarian redistributionism." 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 has 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." 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, which, Friedman rightly observed, were generating a huge bureaucracy and extensive welfare dependency.

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 percent, as most economists recommend. If the family had no income at all, it would receive $5,000--that is, 50 percent of the amount by which its income fell short of $10,000. If the family earned $2,000, it would get $4,000 from the government--again, 50 percent 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. This is very different from many social welfare programs, in which a household either receives all of a benefit or, if it ceases to qualify, nothing at all. The all-or-nothing model encourages what social scientists call "poverty traps," tempting the poor not to improve their situations.

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. The NIT simply provides the poor with money, which they can use to meet their various needs. Friedman strongly believed that individuals have the capacity to promote their own interests.

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 (though local authorities would still have to decide whether to grant them access to schools and hospitals). "From an economist's perspective, the negative income tax is the perfect design," Moffitt says. "The only reason an economist would oppose it would be from a strict libertarian perspective--opposition to any kind of government-managed welfare."

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 necessary 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. According to a Heritage Foundation study by Robert Rector, Kiki Bradley, and Rachel Sheffield, the federal portion of America's welfare system cost a staggering $522 billion in 2008, which works out to about $12,000 per poor person aided. Speaking very generally, then, we can estimate that so long as a federal NIT's average payout amounted to less than $12,000, it would cost less than the current welfare system does. True, replacing Medicaid with a cash benefit would pose great difficulties in America's current, heavily regulated health-care system, in which private insurance is artificially expensive. One solution would be leaving Medicaid in place and bestowing a less generous NIT; another, which Friedman himself proposed at the end of his life, would be health-care vouchers, which would work along the same lines as school vouchers.

Posted by at November 15, 2013 1:53 PM

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