The Negative Income Tax: How it works, why it's Important and how it can fix the Broken Family Problem

And how it can benefit impoverished communities without any focus on 'race.'

A Negative Income Tax or NIT is a tax system designed in which people making less than a certain amount of money get paid benefits by the government relative to how much less than that threshold they make.  Hence the name, a normal income tax taxes income, the negative version gives benefits below a certain level, and does so on a dollar-by-dollar or cent-by-cent basis.  This is important because it avoids poverty traps--a condition where increased revenue from work causes benefits to decrease faster than the earnings increase, thereby creating an incentive not to work.

Although closely related, a NIT is different from a Universal Basic Income or UBI.  The NIT is means tested, meaning one has to qualify based on one's income and assets to have it apply.  By contrast, the UBI is not means tested.  The NIT is also not constant, it has a maximum benefit value which decreases with earnings.  By contrast, the UBI is linear with no decrease based on increased income.  Furthermore, Social Security recipients would not qualify for the NIT as they are already receiving benefits, however they would for a UBI.

The concept of a Negative Income Tax or NIT is not new.  Milton Friedman made arguments in favor of it in the 1960s as a cheaper, simpler replacement for all federal welfare programs.  He does so eloquently in this 15 min 1968 video, which I suggest you all watch, even if your opinion of Freidman is low.  In the video, he mentions $3,000.00 for a family of four which sounds like nothing.  In 1968, the GDP Per Capita was $4,695.92, meaning that $3,000.00 was 63.89% of the GDP Per Capita.  That same percentage be equivalent to $40,511.88 in 2020 regarding the GDP Per Capita of $63,413.51, so no, Friedman was not suggesting people live with nothing.  Even if one factors out economic growth, inflation adjusted, $3,000.00 in 1968 equals $22,311.29 in 2020 per the Inflation Calculator.  That, in turn is roughly 85% of the federal relative poverty line for four people of $26,200.00.  Now, in the Seven Plus One Flat Tax Proposal, it is being proposed to replace all welfare programs except Medicaid and federal college grants.  Some on the right may say that is too generous given Freidman suggested that the NIT would replace Medicaid too.  Conversely, some on the left may claim it is not generous enough as it replaces all federal housing and utility aid.

However that is the point.  The point of a NIT is to raise everyone below the poverty line to just above the poverty line, or rather relative poverty line in order to eliminate virtually all relative poverty (as virtually nobody in the US is poor as in living on less than a dollar a day).  It is supposed to be a safety net, not a security blanket, a cushion for people on hard times, not something one can comfortable live off of for years.  Sure, there are addicts, whether addicted to alcohol, drugs, gambling, porn or sex, whom will blow their money to fuel their addictions, and there are those with mental disorders whom refuse medication and choose to live on the streets.  However they blow their current welfare benefits on such activities and substances, making the NIT no worse off than current policy on that matter, something else Freidman eloquently elaborates on.  For everyone else, including the working poor, the NIT would lift them out of poverty and ensure that they never re-enter it.

The NIT is not without it's critics.  Studies have shown that people would work fewer hours if they knew they were covered by a NIT.  Yet I am all too aware of the connection between stress and health—both mental and physical.  Would reducing stress reduce the prevalence of cardiovascular disease and mental illness among the relative poor?  If so, how much would that end up saving, both in cost for the relative poor themselves and for society as a whole?  Would it be roughly equal to the lost hours worked, would it be less, would it be more?  Would an increase in the minimum wage partially offset this reduction in hours worked by increasing the incentive to work?  Furthermore, what of the benefits of increased educational attainment?  I do not have an answer here, but I am willing to look at all of the externalities of a NIT in order to get a more comprehensive view of it and it's effects, both short term and long.

One of the beauties of a NIT is that it is applied universally, regardless of age, skin color or gender, something which Friedman comments on in the video linked to earlier.  Although there are minority communities which suffer from high poverty, one can use the NIT to alleviate all poverty without mentioning any specific group.  With all of the skin-color focus from Identity Politics and Wokeism, this would bring a long-desired and long-needed break from the racial rhetoric, while harming nobody, save those whom earning livings off of inflaming racial tensions.  It would also bring bipartisan unity as for the right, it reduces the cost, complexity and bureaucracy of the welfare system, while for the left it provides a means-tested guaranteed basic income.  Most important, however, is that it would end relative poverty.

Now to take a step back and look at the Seven Plus One Flat Tax Proposal's NIT.  It is tied to the Personal Exemption, the new name for an enlarged Standard Deduction for tax purposes and to the federal Poverty Line, and, unlike Friedman's proposal, has a 40% rate as opposed to a 50% one to further create an incentive to work.  It is also tied to the income tax rate which is set at 20% with few deductions and exemptions beyond the Personal Exemption.  The Personal Exemption is equal to half of the GDP Per Capita for an adult, and 17.5% of the GDP Per Capita for a child.  When it was written in 2018-2020 using 2018 data, the federal poverty line was $12,140.00 for one person plus $4,320.00 for each person in their care.  With the GDP Per Capita in 2018 being $63,064.42, this amounted to 19.25% of the GDP Per Capita for one person and 6.85% for each in their care.  The proposal anchors the percentage of adults to 20.0% and children to 7.0% or $12,612.88 and $4,414.51 in 2018 respectively.  Conversely, in 2020, the GDP Per Capita was $63,413.51, which would have made the Personal Exemption for an adult $31,706.76, while for a child it would be $11,097.36.  Relative Poverty Line values would be 40% of those, or $12,682.70 for adults and $4,438.94 for children.

Although you may not have grasped it, I already showed how it can fix the broken family problem.  Notice in my previous paragraph how I mention the category 'adult.'  Unlike in the current system whereby the spouse would be another roughly 35% of the primary earner, the spouse would receive benefits equal to the primary earner.  Consider a nuclear family of four.  Under the 2020 definition, the relative poverty line for them was $26,200.00 ($12,760+$4,480*3).  With the NIT, the benefits they receive would be $32,243.28 ($12,682.70*2+$4,438.94*2).  This not only eliminates the penalty of people marrying, but it creates a financial incentive to do so.  For those who fear that this increase will lead to more welfare spending, wait for my upcoming posting about the benefits of an increased minimum wage and it's ability to reduce welfare spending.

The mechanism in which the NIT works is as simple as it is elegant.  For every five cents an adult, parent or family has in income which is below their Personal Exemption, they receive two cents in government aid, down to receiving the maximum amounts mentioned in the above paragraphs if they are out of work altogether.  Likewise, for every five cents in earnings starting at zero, benefits are reduced by two cents in the same linear fashion, creating an incentive to work, without the penalty of a poverty trap.  This is what is shown on the graphic on the top of the page, turning a dataset regarding taxes for a single individual without children based on earnings relative to the GDP Per Capita into a graph.  The line represents the income tax, the line represents the Payroll Tax and the line represents their combined effects, albeit minus the employer portion.

The NIT would also serve as a child tax credit as people earn more money.  This is because children are added to the Personal Exemption of their parent(s).  As earnings increase beyond the Personal Exemption level, parent(s) with children would pay less in taxes than those without.  Additionally, the size of the personal exemption for children increases based on the employment of the parents.  Although the default rate is 35%, this could be increased to 40%, 45% or 50% depending on whether the parent(s) are combined working half time, full time or time and a half compared to working less than half time (under 1,000 hours per year per parent) which is the 35% base point.  Those working more hours, up to time and a half employment (3,000 hours a year or 6,000 for a couple) would see their children's addition to the Personal Exemption equal half that of an adult.  Take the same nuclear family I mentioned before and assume that the parents are working long hours, time and a half employment, to support themselves.  Their exemption level would, as of 2020, be $95,120.27, compared to $63,413.51 if they had no children.  Being taxed at 20%, they thus, would pay $6,341.36 less in taxes, or $3,170.68 per child, than if they had no children.  Even if there was only one parent working full time (which would have children counted as 40% of an adult), the nuclear family would pay $5,073.08 less in taxes, or $2,536.54 less per child, than if they had no children.

Lastly, there are some constraints on the NIT given human nature and the madness of Identity Politics of 'Wokeness'.  Each adult beyond two adults living together receives a Personal Exemption—and thus NIT figure—of half an adult.  This is to prevent 4, 5, 6 or so adults living together and getting rich off of the system.  Individuals with disabilities would be able to receive more, depending on the severity of their disability, however trivial issues such as gender, 'race', sexual orientation and gender identity would not count as disabilities.  Only issues which would hinder work—whether mental or physical—would.  Those unable to work and unable to take care of themselves such as people with severe Downs Syndrome or severe Autism, along with working-age people whom have suffered debilitating strokes would receive up to twice the NIT figures for an adult ($25,365.40 as of 2020) as well as be covered by Medicaid.  For those on the left, having one on the right advocate for such arrangements may come as a shock, however the ideas are all right wing in origin.  For those whom are also on the right and disapprove, remember whom it was who pushed for these concepts.

On one final note, I wish to apologize for the length of my first article.  I am a detail oriented prolific writer, and being short is not my strength.  It is my nature to define things in detail, and I hope I both have been able to better constrain myself this time, and that any of you whom read my previous article were not bored to tears.