Saturday, October 29, 2005

The Negative Income Tax

Alright it seems my last post warrented a death threat in rhetort. How do I follow that up. Christ there are lots of crazies. I came home wanting to talk about the Negative income tax. Oh well. The show must go on. I have already done posts on the evils of its opposite-- the graduated or progressive tax model (see earlier post)

The easiest way to increase the amount of money available to welfare programs is by changing the means in which they are administered, first, simplify the program to protect them from being exploited from loophole abuse, and secondly, reduce the size of the ever growing bureaucracy that does the administering. Current regulations are complicated with deductions, credits, differing allowance rates, and property considerations, which allows them to be easily exploited by individuals, and even worse than that, a massive bureaucracy is required to monitor and administer the complex program, a bureaucracy also equally vulnerable to abuse and unnecessary waste. Fixing both of these problems can be specifically achieved through the introduction of a negative income tax - subsidy program to replace the current, overly complicated, and mottled legislation of the positive income tax system, which drains our welfare revenue base at an ever increasing rate.

The positive income tax system allows people to receive a certain level of income exempted from taxes. The exempt amount is based on rates, which are deemed as a minimal for subsistence. This level is superficially low so that the government can begin taxing income as soon as possible. Any income earned over this level is subject to being taxed. The problem lies in the fact that if the marginal earner makes under this exempt allowance level nothing happens. The unused allowances simply put, goes unused and wasted, plus he is ineligible for welfare benefits, as he is considered employed. This system punishes the low wage earner as he is unable to recover these unused benefits, and this in effect begins to transfer the incentive from working to not working, as welfare, monetarily speaking, is comparable to the artificially low level of exempt allowances.

A negative income tax system would allow for some portion of the unused allowances to be recovered up to the specified exemption level at a set subsidy rate. Milton Friedman, the system creator recommends a rate of 50%. This rewards the low income earner versus the non-worker, instead of punishing him with essentially 100% tax rates, as all earning are essentially deducted from welfare payments in a positive income tax system. A negative tax system with an exemption level of $20,000 for a family of four with subsidy rate of 50% qualifies a family of four with no income to be eligible for $10,000. Any income made on top of this initial amount reduces the subsidy by 50%. If the family of four earned $12,000 in a single year, the subsidy would be reduced by $6000, giving the family an overall income of $16,000, at an expense of $4000 to the taxpayer. Where as with a positive income-tax systems, the family of four would be left with the decision of taking their earned amount of $12,000 or being completely unemployed and still earning $11,500 from the government, with no incentive to earn the $12,000 as it would be only a $500 improvement over not working at all.

Positive income tax guidelines are designed to benefit only those who are completely unemployed. Unused credits from those that are marginally employed are not refunded, which shifts incentive from working to not working for the low-income earner.

Lack of skills is the biggest problem facing recipients. Keeping recipients in the workforce is of optimal importance as it is the only way to build the worker’s skills, and prevent already present skills from further atrophy. Welfare handouts have no way of passing on the virtues of the employed to the unemployed.

Welfare mother’s are penalized, instead of rewarded when they earn extra money, through such pursuits as babysitting or working one day a week in a restaurant, men turn down the opportunity to drive a cab once a week, because it is essentially deducted 100% from their welfare payments. When the tax rate for low wager earners is essentially 100%, there is little incentive to work.

The primary goal of the state whenever dealing with the unemployed should be to keep them working. A penalty of 100% on extra initiative should be reconsidered.

The strength of a country lies in its citizens and their productivity. A government’s role is to nurture this productivity and not to destroy it with insecure legislation.


At 1:01 PM, Blogger ferrethouse said...

What we need is a tiered welfare system. Your benefits are clawed back by 10% every year beyond two years. Welfare is not a way of life.

At 5:24 PM, Blogger Aaron said...

Wow. That post ought to eliminate any stereotypes people have of roughnecks. Very good explanation of Friedman's concept indeed.

At 6:18 PM, Blogger angryroughneck said...

Aaron are you trying to make a roughneck blush?

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