Negative income tax

The negative income tax is a system of taxation under which individuals with an income lower than a government-defined threshold receive supplemental money from the government based on the differential between their income and the threshold. Milton Friedman was a major proponent of such a tax, but Murray Rothbard strongly opposed it.

The perceived advantage of such a tax is that it could result in a simplification of the tax code, if other welfare programs and the minimum wage are eliminated. Thus, the overall administrative costs of aid programs could be reduced.

However, Rothbard considered this innovation extremely dangerous, for a number of reasons. He argued that it would reduce the labor supply for low-wage work, as few people would work for the same amount of money the federal government would simply give them. Furthermore, as the costs of the program ballooned, tax rates might be raised on individuals whose incomes were not dramatically higher than the threshold, thus reducing their net incomes and giving them incentive to stop working as well, further reducing tax revenue.

Rothbard also felt that existing welfare laws, because of their complexity, act as a disincentive to individuals to stay on welfare, because they must repeatedly prove their eligibility for the aid programs. With a negative income tax, however, Rothbard foresaw extensive fraud, due to the program's presumption of eligibility based on reported income. Similarly, he argued that in many areas, cultural pressure against welfare was prevalent, thereby encouraging individuals to avoid it, but that a negative income tax would encourage people to accept a guaranteed income as a right, therefore leading to higher long-term costs and greater dependency.

In terms of implementation, Rothbard saw two additional dangers – first, the likelihood that the threshold would be perceived as too low and driven up to at least the government's official "poverty level," and then adjusted continually for inflation. He also predicted that instead of replacing existing aid programs, it would simply add to them, creating more complexity and higher administrative costs instead of reducing both.

When a negative income tax was proposed in Congress in the early 1970s, it was indeed not intended to replace all existing programs, leading to Milton Friedman opposing its adoption as well, for the same reasons.

References

• Rothbard, Murray (1970), "On Milton Friedman" (audio).

Links

• Writings
  • "Fallacies of the Negative Income Tax" by Henry Hazlitt, 1969
  • The Free Market: "Friedman's Mistake" by Laurence M. Vance, November 1996
  • "Negative Income Tax Is Back" by Walter Block, November 2008
  • The Conquest of Poverty by Henry Hazlitt, 1973 (p. 116-120)

• Other media

Free to Choose - "From Cradle to Grave" by Milton Friedman, 1980