The Negative Income Tax: A New Paradigm

The negative income tax, or NIT, is a system where people who make under a certain income receive a certain amount of money from the government over the course of a year. Let me elaborate. Let’s say that the NIT threshold, where the government would not let you fall under, was $15,000/yr.

Let’s also say that the NIT rate was 50%. Then, if an individual made $10,000/yr then they would have a negative taxable income of $5,000. That $5,000 would be taxed at 50%, leaving them with a $2,500 tax credit from the government in monthly payments. If someone had no income they would have a negative taxable income of $15,000, that would be taxed at 50%. They would receive $7,500 in monthly payments. These numbers are just for explanation. So why is this system more desirable than the current system or a universal basic income (UBI)? Also, would the NIT decrease the incentive to work?

I am going to answer both questions. There have been studies done looking at the effects a NIT would have on low-income employment. These studies took place in Pennsylvania, New Jersey, rural North Carolina and Iowa, Seattle, Denver, and Gary, Indiana. Three of the studies were limited to specific groups of people; only husband-wife couples were studied in New Jersey and Pennsylvania and in the rural experiment, and only blacks in the Gary test, although the Gary test included both couples and families headed by women.

All races and family configurations were used in the Seattle and Denver studies. The sample sizes for the studies were: 1,300 in New Jersey and Pennsylvania, 800 in the rural tests, 4,800 in Seattle-Denver, and 1,800 in Gary. Each study had one group that received benefits from the NIT and another group that did not, acting as the control group. The data showed that hours of work are reduced by the negative income tax.

The disincentive effects for husbands range from about 1 percent to 8 percent. For wives, they vary much more-from almost zero to 55 percent. Disincentives of 12 to 28 percent were reported for female family heads in the only two experiments for which numbers are available. Does this not disprove the NIT? Well, you have not heard the whole story. Those numbers show the reduction of weekly hours, not jobs. One reason that hours decreased, but jobs did not is because since the workers were receiving the tax credits, they did not have to work as many overtime hours.

Another reason for this is that these people had a lengthening of time between jobs because they were looking for better jobs. Younger workers saw an increase in school attendance, which would lead to an increase in wages in the long run. In the Gary study, there had been heavy layoffs in the steel industry since the beginning of the study that caused some of the hours to be lowered.

The people receiving the tax credit did see a slower return to work because they saw the new tax credits as a type of unemployment insurance. They waited around longer so that they could look for higher wage jobs. If these people get a higher wage job then they have more money to spend, if they have more money to spend, aggregate demand increases, which drives the economy.

For those who do not know, aggregate demand is the total demand for goods and services in a market or economy. If they choose to save it, aggregate demand increases in the long run, both net gains to the economy. There could also be a benefit reduction over a certain period of time to ensure that people did not abuse the system, or a form of workfare could be implemented. Also, if a low-income individual returned to the workforce they would receive the Earned Income Tax Credit (EITC). This would further reduce the incentive to not return to the workforce.

Another thing that should be considered is that these studies have limitations. For example, not one of the studies lasted longer than 3 years and participants could have behaved differently because it was not a permanent national program. Also, there is a tendency for individuals in the short run to over respond (reduce work effort more than they would in a permanent federal program) in order to take advantage of the tax credits that are temporarily available.

The potential cost savings of the NIT would be extraordinary. Current US welfare spending minus Medicaid and the EITC is $508B. Estimates for the NIT range from $180B to $300B. Even if we take the highest estimate, that is a cost saving of  $208B/yr. To find the cost of a UBI we take the total US adult population and multiply it by the UBI, which we are going to say is $15k. The estimated US adult population is 247,491,000 and that multiplied by $15k is $3.71T. As you can see, even the highest estimated costs of an NIT are far cheaper than a UBI.

Another argument brought up against an NIT is that people would waste the money on drugs or alcohol, but the data doesn’t support those claims. According to the Center for Budget and Policy Priorities (CBPP), “One major study conducted a short survey and in-depth follow-up interview of 194 families that received an EITC of at least $1,000 in the tax year 2006 to discern how families actually used their refunds. 

The study found that the families spent roughly half of EITC refunds on current consumption, such as groceries, child expenses, and furniture. They spent the other half paying off past-due bills and debt, and for ‘asset-building’ such as savings, education, or home ownership and home repairs. 

Nearly two-thirds of families spent part of their refunds on expenses related to raising children, and about one-third made car purchases or repairs.” They were talking about the EITC, which is the NIT for low income, working families only. Also according to the CBPP, the EITC promotes work, reduces poverty, and supports children’s development.

In conclusion, an NIT would be cheaper and more effective than a UBI or the current system. It would eliminate welfare cliffs and has the greatest incentive to work. People would spend the money wisely and not waste it. It is the economical and moral thing to do.


  1. “About Eitc | EITC & Other Refundable Credits.” N. p., 2017. Web. 23 Nov. 2017.
  2. N. p., 2017. Web. 23 Nov. 2017.
  3. “EITC And Child Tax Credit Promote Work, Reduce Poverty, And Support Children’S Development, Research Finds.” Center on Budget and Policy
  4. Priorities. N. p., 2012. Web. 23 Nov. 2017.
  5. Niskanen Center. N. p., 2016. Web. 23 Nov. 2017.
  6. “U.S. Census Bureau Quickfacts: UNITED STATES.” N. p., 2017. Web. 23 Nov. 2017.
  7. “US Welfare Spending For 2018 – Charts.” N. p., 2017. Web. 23 Nov. 2017.

Curt is a 17 year old boy who started the Instagram page, @realistickeynesian. I enjoy politics, economics, and foreign policy and consider them all some of my passions. I want to make sure everyone knows the truth about politics and what policies work and do not work

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