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Today in inequality reading: The negative income tax

Cato's Facebook page points me to this new National Affairs article by Harvard professor Jeffrey Miron, who proposes scrapping pretty much all U.S. entitlement programs and creating a "negative income tax:"

A negative income tax — an idea advocated by Nobel prize-winning economist Milton Friedman — would have two key components: a minimum, guaranteed level of income, and a flat tax rate that is applied to the total amount of income (if any) that a person earns. The net tax owed by any taxpayer would equal his gross tax liability — that is, his earned income multiplied by the tax rate — minus the guaranteed minimum income. If the gross liability were to exceed the guaranteed minimum, the taxpayer would owe the difference. If the gross liability were to fall short of the guaranteed minimum, the government would pay the difference to the taxpayer.

To illustrate, consider a negative tax-rate structure under which the guaranteed minimum is $5,000 and the tax rate is 10%. In this situation, a person earning no income would get a transfer from the government of $5,000 and have a total income of $5,000. A person earning $100,000 would have a gross tax liability of $10,000 and a net tax liability of $5,000, for a total after-tax income of $95,000. A person earning $10,000 of income would have a gross liability of $1,000 and a net liability of negative $4,000 (that is, this person would get a check from the government for $4,000), for a total after-tax income of $14,000.

The chief appeal of this proposal, according to Miron himself, is simplicity: One program to rule them all, instead of a hodge-podge of agencies that disburse various types of aid. Make sure everybody has a minimum level of cash in their pocket and send them on their way. It reduces admininistrative costs, and it frees entrepreneurs and big businesses to get on with the business of creating wealth. And that is enticing.

But I've got a couple of quibbles with Miron's piece -- one being the premise, the other in the proposal itself:

* The premise is that the welfare state is a huge drag on wealth producers. Maybe, but I'm not certain he makes the case. Part of his case is a table showing that the wealthiest 1 percent of Americans pays 28.1 percent of all federal taxes. That does seem disproportionate until you realize that the wealthiest 1 percent of Americans own 42.7 percent of the country's entire wealth. Sounds like America's richest citizens are kind of getting off easy, actually. 

Look closer at the charts: The top 20 percent of Americans pay 68.9 percent of federal taxes, but control 85.1 percent of the wealth. The least-wealthy 80 percent of America owns 7 percent of the wealth -- and pay 30.9 percent of taxes. The burden of government, then, already falls disproportionately on the people who do most of the working and paying and living and dying in this country. 

* And that situation would probably get worse under Miron's proposal. Why? The flat tax that Miron says is a key part of the proposal. Everybody above Miron's minimum income rate would pay the exact same rate in taxes. But let's be honest: 10 percent out of a $10,000-a-year income is more burdensome in all sorts of ways than $10,000 out of a $100,000-a-year-income. The proportion of taxes might be more evenly amongst income groups, but it would feel heaviest to the people on the bottom. And as Miron himself suggests, there might be incentives for people right above the poverty line to abandon work and go on the dole. That's a problem with any program, but it seems likely to be a bigger problem if abandoning a progressive tax rate unduly burdens the lowest-income workers.

And to be honest, I'm not certain why a flat tax is a necessary component of the negative income tax. You can get the clarity Miron looks for, I think, by retaining a progressive tax system but reforming it to get rid of a ton of loopholes. That would allow tax rates to go down, even at the high end.


Monkey RobbL said…
But let's be honest: 10 percent out of a $10,000-a-year income is more burdensome in all sorts of ways than $10,000 out of a $100,000-a-year-income. The proportion of taxes might be more evenly amongst income groups, but it would feel heaviest to the people on the bottom.

I don't know, Joel. Unless I'm missing something on the math, it appears that nobody (in your example) making less than $50K per year would pay any tax at all. That's a pretty high "poverty line" for tax purposes.
KhabaLox said…
I think those numbers are just examples, and not an actual proposal.

Also, the way this is presented by Miron is a bit misleading. The $5k number is not the minimum income level. It is the new Personal Exemption. And the way it works out, the tax ends up being slightly progressive. With the numbers in the example, a $50k earner has an effective tax rate of 0%, 100k is 5%, and 200k is 7.5%. In fact, no one pays 10% tax, because everyone gets 5,000 back.

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