Fallacies of the Negative Income Tax
Henry Hazlitt advocated the "negative income tax" long before Milton Friedman, but later realized the problem with the idea. It is either inadequate at the lower end or excessive at the higher end. The unpalatable truth seems to be that whenever we try to "increase incentives" by reducing a relief payment by less than a dollar for every additional dollar of self-earnings, we solve an immediate problem at the cost of building up a bigger problem for the future. FULL ARTICLE
Comments (15)
12/27/06am I much prefer to read about bloated, harmful, pandering federal SPENDING. The reason we have federal taxes. Address the "problem" directly.
Allen Young
Published: December 27, 2006 7:38 AM
All the production in the world will not help the people who can't deal with cash money and can't plan ahead.
(How does my computer know how to complete the security code number? Are there a limited number of secret numbers?)
Published: December 27, 2006 12:39 PM
As Hazlitt hinted at, the real problem, even if a good formula could be found, is that *politicians* would be enacting it and would face political pressure to tinker with it, making it thoroughly as useless or harmful as most other government programs. "Philosopher-statesmen" are as rare as philosopher-kings.
Published: December 27, 2006 12:58 PM
A number of really salient ideas advocated in the post – but I wonders if Mr. Hazlitt appreciates Prof Friedman's goal of pragmatic improvement. Prof Friedman never suggested that the NIT would provide a poverty panacea, but merely simpler and more transparent alternative to the complex and wasteful system of welfare handouts in existence today.
It certainly has obvious short comings, but would indeed prove less costly then our current system – and would certainly be simpler to administrate. Whether or not the subsidies would be increase over time is a political matter that can’t adequately be answered without invoking some brand of clairvoyance. In a political climate where such policies were actually adopted, one might imagine an electorate with the fortitude and intelligence to continue the process of dismantling the existing network inefficient and ineffective federal handouts.
As Voltaire accurately observes – perfection can indeed be the adversary of the good – or in this case improvement.
Published: December 27, 2006 12:59 PM
Of course even Milton Friedman testified AGAINST President Nixon's plan (before Congress). Because instead of being instead of the various Welfare State programs (Social Security, Medicare, Medicaid and so on) the "negative income tax" was to be ON TOP OF THEM - hardly what Milton Friedman had in mind.
Of course the "negative income tax" is government spending (it is a welfare scheme by another name). In Britain a similar scheme to President Nixon's is called "tax credits" - people who do not pay any income tax still get "tax credits" (introduced by Mr Gordon Brown).
So instead of work making people independent of government, people can get a job and still be given government handouts. In America I believe the "earned income tax credit" is sometimes greater than the amount that people actually pay in income tax (in which case it is also a disguised welfare scheme).
It is an old idea. In 1795 in the village of Speenhamland the magistrates started to hand out money (from the local property tax payers) to poor people who were work - this system spread over most of England and south Wales.
By 1834 (when the system of wage subsidy was finally abolished) small farmers and businessmen were being bankrupted in order to subsidize the wages of workers on larger farms. Of course the larger farmers paid property tax also - so they had to keep their wages down.
The whole stucture was a total mess (just as "tax credits" are in Britain now).
People who deny enconomic law say they are "empirical" they "learn from history". But this is not true, they learn nothing - otherwise they would not keep making the same mistakes.
If taxes on the poor are too high - then cut (or abolish) these taxes - do not set up complex schemes and employ lots of new administrators.
"But people can not plan ahead" - and they will never learn to while the state "takes care of them".
The level of human conduct is not static - the more government gets involved the more the moral capital of people (their capacity for true "self government") will decline. As will familes, communities, mutual aid and civil interaction of all types.
In the end the Welfare State creates an underclass. Not genetic - environmental, their own learned experiences and those of their parents and those people they know.
Published: December 27, 2006 2:12 PM
Tax credits are indeed an old idea. In the U.S., low income workers with children can get more back than they pay in with the Earned Income Credit.
Published: December 27, 2006 3:27 PM
BEGFEFWEU
Gerald Ford Remembered for His 'Calm and Steady' Hand
Published: December 27, 2006 7:05 PM
GFWEWEDQWE
Gerald Ford Remembered for His 'Calm and Steady' Hand
Published: December 27, 2006 7:07 PM
This article kills off the other myth that 'welfare should be replaced by charity'. Whilst charity would be seen as better at the top end of town because only Socialistic minded people get give their OWN money to the poor, at the bottom end of town the result is still the same: something for nothing.
Published: December 27, 2006 7:35 PM
What strikes me most about this article is the numbers involved, considering that it wasn't written all that long ago. Good thing Greenspan was such an inflation hawk and goldbug!
Published: December 27, 2006 9:27 PM
There is a simple question here: in a fiat money system, how the Austrians intends to redistribute the seigniorage?
Published: December 27, 2006 10:20 PM
Marco Saba:
As an Austrian my goal is the total destruction and oblivion of fiat money and central banking. My goal is the introduction of a 100% commodity money system, a 100% reserve banking system and the total separation of the monetary and banking systems and state. The issue of seigniorage would, of course, become moot.
Published: December 27, 2006 11:07 PM
I am not an economist. Infact this was the first post where I ever heard of negative income tax. However, I feel that the numbers in the examples just don't add up.
You say "An orthodox relief program would pay the jobless head of a family, say, $60 a week. If he then started to earn something, he would be paid simply the difference between that amount and $60. Under the NIT principle a man who was earning nothing would also receive a relief payment of $60 a week. But if he then earned $30 a week on his own he would still get a $45 payment (reduced by only $1 for every $2 earnings), bringing his total income to $75 a week."
According to me under the NIT principle if he earned $30 a week on his own he would still get a $15 (half of the difference) payment from the government. So his total income would be $45 and not $75.
So there is no anamoly. Anytime a person earns more than $60 he gets nothing from the government. Anytime he earns less than $60 he would be just that much close to $60. So earning $58 a month would get him $1 from the government for a total salary of $59.
Published: December 28, 2006 4:25 PM
Hazlitt, Friedman, and everyone else seem to ignore an important danger of an NIT type approach to helping the working poor. Would not the initiation of a negative income tax (all other things being equal) serve to drive down the wages offered to employees at the lower end of the pay scale? After all, if higher wages are to be offset by smaller tax credits, a lower wage becomes more palatable for the worker in such a position.
Published: December 29, 2006 10:22 AM
Tax credits are indeed an old idea. In the U.S., low income workers with children can get more back than they pay in with the Earned Income Credit.
Are they getting back more than they pay in when all taxes are considered? Certainly, the EITC refunds more income tax than they pay, but what about the costs of tarriffs, regulation, corporate income tax, subsidies, etc.?
- Josh
Published: December 30, 2006 12:28 PM