Negative Income Tax: How does it differ from basic income?

Last week, I gave a broad overview of Universal Basic Income (UBI) – a policy proposal which could 1) provide an unconditional cash grant for all American adults and 2) replace the large and complex US welfare system. In this post, I am going to focus on a popular alternative to UBI: Negative Income Tax (NIT). There are some important distinctions to make between the two, so I will first highlight these before delving into how exactly a NIT could be implemented.

What’s the difference?

It is important to note that UBI and NIT are not at odds with one another. As Karl Widerquist* puts it,

The NIT differs from the now commonly discussed version, basic income (BI), in that it gives money only to those with low income, while BI gives the same basic grant to everyone. However, both are basic income guarantees in the sense that they guarantee some minimum level of income for everyone.

Unlike UBI, which would provide the same cash grant to every citizen, a NIT’s cash grants would vary based on how much taxable income a person receives. Therefore, citizens with no income would receive a full NIT benefit – essentially providing a basic income. However, as a person’s income rises, “the size of the cash NIT benefit they receive declines.”

How would NIT be implemented?

Guy Surman provides a simple illustration of how a NIT program would work:

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.

These amounts may preserve the work incentive, but they also are deeply inadequate for those living in poverty. As I noted in my previous post, the poverty line in America rests just below $12,000 per year. So what good is giving people $5,000? As Hazlitt correctly notes,

the problem that the NIT evades or glosses over is the problem of the individual or family with zero income…So if the NIT were ever adopted, the political pressure would be irresistible to make it provide the minimum “poverty-line” income…even to families with zero earned income.

The political difficulty of implementing the NIT led, in part, to the creation of a ‘lite’ tax credit – the Earned Income Tax Credit (EITC). The EITC is a narrower version of the NIT, as it is administered based on income, employment, and the number of children one has. This is a flaw, NIT supporters argue, because a poverty-ameliorating policy should be a perfectly general policy that is based wholly on income, which is an objective criterion. Thus, by including children and work-requirements into the equation the EITC does not go far enough in extending a sufficient wage floor to all low-earning Americans. Below, Friedman makes this very point:

Conclusion

Among basic income supporters (of which there is a growing number; just check out r/basicincome), some prefer UBI, some prefer NIT. As with all things in politics, your policy preferences are shaped by the philosophical and political ideologies you hold dear. As Scott Santens states,

A NIT can only be considered vastly superior if one subscribes to the idea that all taxation is evil, and therefore should always be minimized in all possible cases…

However, one thing basic income supporters can all agree upon is that we must provide a higher guaranteed income for the poorest members of our society. The UBI and NIT are two excellent examples of proactive and progressive ways of dealing with poverty and flat wages in this country. No matter what policy you support, it is refreshing to actually discuss bold and innovative ideas that go beyond ‘expand the safety net’ and ‘cut food stamps’.

 

*Karl Widerquist, “Introduction”, A Retrospective on the Negative Income Tax Experiments: Looking Back at the Most Innovate Field Studies in Social Policy, USBIG Discussion Paper No. 86, June 2004, 1

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Nick Cassella
Nick Cassella graduated from the University of St Andrews in Scotland in 2014. After graduating, he worked on the Initiative 594 campaign before joining Civic Ventures, where he now manages Civic Skunk Works' social media presence.