The more moving parts in a system, the more likely it is to break down. Nowhere is that more apparent than with the American tax code, where even the exact proportions of its complexity remain a subject of fierce debate and misunderstanding. In a system this large and elaborate, its breakdowns are not so much catastrophic as they are multitudinous and lingering. As the country’s top earners have seen their tax rates drop and their incomes skyrocket, an overwhelming majority of workers have hardly seen income growth at all.
The progressive income tax system was initially set up to ensure that the wealthiest pay their fair share to support the least wealthy. However, it fails when combined with the current layout of benefit programs. One adverse side effect is that when a benefit-recipient earns more money, they see their benefits diminish in turn. This can present an unreasonable marginal tax rate, in some cases up to 80 percent, where a low-income worker who takes a higher paying job will see very little added utility. Why take on more hours and responsibility when you are making fractions of a dollar for that time and energy? The result of this structure is poor people being kept poor.
A negative income tax could fix that. In the vision of economist Milton Friedman, such a system would set a basic threshold income figure. Those earning above the threshold would be taxed at a percentage that increases with one’s earning level. Those making below the threshold, however, would be returned a portion of the difference between their income and the threshold level. This structure incentivizes upward mobility as it ensures that those who are working always receive more than people who do not work. A negative income tax reduces the number of moving parts, puts agency in the hands of the needy, and makes sure that while no one is destitute, working more is always more favorable to working less.
Many economists support this idea. Most introductory economics classes teach that giving cash is better than supplying benefits and many studies across the world show that cash has more utility and a more positive impact than in-kind benefits, which cost more than if those citizens were to purchase them outright. Adding burden on government agencies to administer those benefits does not necessarily deliver them any faster or better, and it certainly does not guarantee a reduction in waste. A negative income tax, however, as a streamlined monetary program, would exist within the purview of a single governmental authority: the Internal Revenue Service.
A similar system called the Universal Basic Income (UBI) addresses the wealth gap overall, but it does so in a more convoluted way. UBI is the concept of giving money across the income-earning spectrum only to tax it back from the top again. Although negative income tax technically guarantees a basic income, it does so at a level below the set threshold, and it distributes money in the most statistically fair way from the outset.
Most critically, it encourages work in ways that UBI does not. Its targeted simplicity is precisely what is needed in an overburdened system. So far, UBI has had limited tests with mixed results and implementations that are not necessarily replicable or prone to political consensus. Negative income tax, on the other hand, has established precursors and bipartisan support.
Negative income tax has been introduced in other countries on a limited basis, but the best approximation of the plan is a current American product: the Earned Income Tax Credit (EITC). Enacted by President Gerald Ford, the EITC is a tax credit that grows as one’s income rises, before eventually phasing out gradually at a middle-level threshold.
More than 27 million Americans benefit from EITC assistance, receiving an average of $2,500 each. This brings 6.5 million Americans out of poverty—more than half of them children—and reduces poverty for 21 million others. Originating in 1975, both Democrat and Republican administrations have repeatedly expanded the EITC. Mimicking several aspects of Friedman’s tiered negative income tax, conservatives praise its free-market efficiency while progressives applaud its social benefit outcomes—and that support crosses over to a bigger and better negative income tax system.
Here are four policy perspectives regarding negative income tax that the U.S. could implement today:
The results of previous tests have been pretty good, but they can be improved. Research suggests that negative income tax encourages work, reduces poverty, and has lasting positive effects, but a series of poorly-managed studies from a half-century ago falsely reported a correlation with an uptick in divorce rates. This statistical anomaly led President Richard Nixon to roll back his proposal for a wide-ranging negative income tax. Further discrepancies halted work that could have expanded a negative income tax structure to a significant percentage of those in need. New research can rectify those discrepancies and give legislators a wider mandate to act accordingly.
First, we need to loosen the requirements for enrollment to include more workers without children, non-custodial parents, and young workers over 18. Second, we need to make the payments a more distributed and frequent occurrence—weekly, biweekly, or monthly, instead of yearly—so that lower-earners would get their wages boosted at a regular clip, smoothing out income to match expenses. Third, we need to set the threshold (or breakeven point) at a modern level. These are gradual, natural progressions from an already existing system, making them easier to implement than a massive overhaul or reboot.
Many countries have a harmful perspective on providing cash to citizens. This is especially true in the United States, which is engrained in the American Dream ideal that every American has an equal opportunity to achieve success and prosperity through hard work.
One of the few direct cash-transfer policies in America, the Temporary Assistance for Needy Families program, provides a maximum of $497 per month to a family of four. It has spurred many legislative elements to compose and publicize a list of all of the things that the money could not be used for, such as alcohol, tattoo parlors, bail bonds, cruise ships, dog and horse racing, and lottery tickets, among many others.
This implicitly suggests that aid-recipients would spend their money on these things, furthering the stigma surrounding recipients of public aid as corrupt and lazy. Many of the recipients are single-parent homes where less than $500 a month would not adequately cover a family’s monthly expenses in the first place. These regulations prevent people in need from collecting what’s being offered, amplifies negative racial and socioeconomic stereotypes, and wastes governmental resources by directing them to act as domestic spies on people who are, more often than not, working single mothers.
Around 20 percent of those eligible for the EITC do not receive it, either because they are not aware of the EITC’s existence or because they misfiled their tax returns. A proposal for tax-return-free filing would improve compliance in getting people the credits and benefits they deserve and bring the filing process in line with modern standards, such as those in Germany and Japan.
It is highly unlikely that the current progressive tax system would have been designed as it is today from scratch. It is equally unlikely that it will be rebooted in favor of a clean slate system. However, as elements break down, it is as important to remove the malfunctioning parts as it is to examine those that perform well.
The negative income tax structure is one of those well-performing components. It not only has room to grow, but it also has little standing in its way. This would not require a radical shift of the Overton Window (i.e., public reception of an idea) that other cash-transfer proposals do, and few things in the political discourse are capable of achieving any consensus, let alone the level of agreement that negative income tax garners. For now, the best way to move negative income tax forward is to raise awareness around it, bring it into the mainstream discourse, and show legislators and the electorate that an equitable and elegant solution is possible.