Let’s give the negative income tax a proper try and learn from its failure

Posted on in Social Security Debates

NationalPost.com – Full Comment
June 15, 2015.   John Robson

The negative income tax (NIT) is a bad idea whose time has come. The NIT is a bold, logical, eight-decades-old welfare-reform proposal, long advocated by Milton Friedman, which today has supporters ranging from the Alberta NDP to Post columnist Andrew Coyne. So for goodness sake, let’s give it a proper try and learn from its failure.

The basic concept is simply brilliant. Over many years, we have developed all sorts of programs to help people who have no money because they are unemployed, because they are elderly, because they are handicapped, because they are single parents, because they … hey, wait a minute, we don’t really care why they have no money. We only care that they have no money. So why have a bunch of different programs each with their own costly bureaucracy and sometimes irrational eligibility criteria? Why not just give people money because they’re poor and take some of it back if they get less poor?

Enter the NIT. You file a tax return or equivalent saying how much you earned last year, or how little, and if it’s above a certain amount, you pay a certain percentage of the difference, and if it’s below, you get a certain percentage of the difference. It need not change the system for high-income earners; we could keep the positive income tax as it is. But it would make things much simpler and more effective for low-income earners.

If, say, we set the minimum income at $20,000 and take back 40 cents for every dollar you earn, you’d end up with $20,000 if you earned nothing, $23,000 if you earned $5,000, $29,000 if you earned $15,000 and so on until at $50,000 you’d get no subsidy.

Of course we can tweak the details. But the basic concept appeals to the left because it reaches everyone in need and avoids degrading means tests. And it appeals to the right because it avoids bureaucracy and serious incentive problems with existing approaches — from distorting markets with rent controls, to encouraging malingering with disability tests, to the infamous “welfare wall” where a person lifting themselves out of poverty loses so many uncoordinated cash and in-kind subsidy programs at once, they hit what amounts to a 60 per cent marginal tax rate that nobody intended or wants.

Why, then, did I say the NIT was a bad idea when it’s so clearly brilliant? And why has it been tried so rarely, given the discontent across the political spectrum with the cost and effectiveness of existing programs?

On the latter, it’s partly resistance from vested interests. The left blames stinginess, the right bureaucracy, and both go on to more politically rewarding pursuits than questioning subsidies on which many voters depend. But mostly we’re afraid to question current social policy because we know we won’t like the answer.

Which brings me to why the NIT is a bad idea. The real problem with welfare programs isn’t bad design, insufficient funding or bureaucracy. It’s that incentives matter and welfare, broadly defined, rewards the wrong things.

As John Stuart Mill asked in 1846: “Is it not the testimony of experience in all branches of human affairs … that men never trouble themselves to earn what they are able to demand?” If Mill’s too chilly for you, try George Bernard Shaw: “small as the dole may be it must be sufficient to live on; and if two or three in one household put their doles together, they grow less keen on finding employment, and develop a taste for … amusing themselves at the expense of others instead of earning anything.”

People wind up poor due to varying combinations of difficult circumstances and poor choices. We sympathize with the former and, within limits, the latter. But government welfare programs soften the impact of misfortune and bad judgment at the cost of making the latter considerably more probable, unlike the private charities they displace.

I could go on at length about how, if your job stinks, giving the unemployed a raise makes you more likely to quit. And about how, over time, paying people for lacking marketable skills creates a culture of dependency. But there’s no need.

First, it’s obvious. Second, since everyone’s unhappy with the current system, by all means let’s replace it with a sensibly designed NIT. But then let’s pay attention to the result.

In 1993 former New Zealand Labour Party finance minister Roger Douglas wrote: “By the late twentieth century, the most disturbing question about social welfare and the poor and disadvantaged was not how much it cost but what it had bought.”

If the NIT actually makes people’s lives worse at enormous cost, we’ll have the answer to that question. Public welfare bought what it paid for: improvidence and misery. If so, we’ll be sadder but wiser.

It’s time to find out.

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