Negative income tax (NIT) was a 1962 theory of tax reform proposed by Milton Friedman, famed American monetarist and über-liberal marketeer in his work Capitalism and Freedom.
It worked as an exact mirror image of the regular income taxation. It
would have imposed a cut-off point where positive income tax (PIT) ended and NIT began.
Above this cut-off rate of income, PIT works as we’re all used to – for the amount you earn over
that cut-off, you pay a certain percentage of your income to the government. Say the cut-off is
£10,000, and you pay 20% of what you earn above that level. So, a person on a salary of £15,000
pays £1000 (20% of the £5000 they earn above the cut-off).
Below the cut-off, the government pays you a percentage of the difference between your income and
the cut-off – an absolute mirror image of the PIT system. I’ll use the 20% rate again for clarity.
Someone earning £4000 is £6000 below the boundary, and will therefore be paid £1200 by the government.
Friedman suggested this tax system work in tandem with a system of vouchers for public
services, whereby state funding is substantially or entirely withdrawn. The cumulative effect of
negative income tax and the voucher reforms would be to ‘obviate the need for all the state welfare
programmes now in existence’ (Dearlove and Saunders, 2004). It would guarantee a minimum income for
the poorest in society and shrink government by dismantling the vast and inefficient welfare
bureaucracy, all the while reducing costs for employers by subsidising wages.
taken up by the Office of Economic Opportunity under Lyndon Johnson, and was field-tested in New
Jersey from 1968 to 1980. The British Conservatives flirted with the idea,
briefly, as part of Margaret Thatcher’s attempts to cut government spending on the welfare state.
President Reagan, likewise, floated a similar idea before Congress, but using different language -
his proposal was called 'middle income tax relief'. The idea still retains some credence with liberal
economists, despite its more or less comprehensive discrediting in practice, documented by Charles
Murray in Losing Ground.
Murray, a conservative American economist, drew conclusions from the work of the
University of Wisconsin’s 12 year trial of the NIT system. This research, conducted by Philip
Robins, Richard West and John Bishop, showed unexpected and unwanted effects of NIT. Those
granted reimbursement under NIT showed a disincentive to work – they knew they would receive more
cash payments the less they earned, and it was shown that there was a 9% work reduction for husbands
and an 18% reduction for wives in dual-earner households. A somewhat unexpected result was the
increase in divorce rate, hypothesised as being caused by a decreased reliance on a breadwinner.
The system is also somewhat hamstrung in terms of its original objectives, as it still requires
extensive administration and bureaucracy to monitor and distribute payments and avoid fraud.
Despite the wishes of the Thatcherites, it would always have been politically
impossible to dismantle the welfare state to the extent Friedman advocated. The fact that NIT showed
few benefits in practice only serves to underline this fact.
Allen, J., 1993. Negative Income Tax, Concise Encyclopedia of Economics,
Dearlove, J., and Saunders, P., 2004. Introduction to British Politics, Polity Press
Windybank, S., 2001. Beyond the Welfare State: Susan Windybank talks to Charles Murray,
Policy – Spring 01. http://www.cis.org.au/policy/Spring01/PolicySpring01_5.html
Negative Income Tax, Wikipedia. http://en.wikipedia.org/wiki/Negative_income_tax
Thanks to LeoDV, themanwho and assorted catboxers for opinions/advice.