Due family obligations and a busy schedule it has been difficult for me to write on the many events that have occurred in our country over the last few weeks. However, after what has happened with the whole budget debacle I felt compelled to write something as opposed to nothing. Here we have two sides with two opposite Ideologies. One side believes in spending so as to create jobs, social programs, and taxation of the rich. The other side believes in spending cuts, the dis-continuation of social programs and tax cuts for the rich, as well as the middle class. Both sides want the economy to improve. So how do we compromise on such opposite ideologies? I submit to you the Negative Income Tax (NIT).
Now don't get me wrong, I've always been Conservative, and no I'm not moving to the middle. The Negative Income Tax is not a new idea and it could actually be a benefit to Republicans by exploring it. The NIT was introduced in the late 1960’s by free-market economist Milton Friedman as an alternative tax to combat the ever increasing welfare state that was being created by the Government. In a recent City Journal Article by Guy Sorman, I read and re-read the NIT idea and, to be honest it is really thinking outside of the box; something that our “Great Leaders” in Washington should be doing at this point in History.
So what is the NIT? In the City Journal Article that I read, Sorman writes: “The NIT is easy to describe. ‘The basic idea,’ Friedman wrote in a 1968 Newsweek column, ‘is to use the mechanism by which we now collect tax revenue from people with incomes above some minimum level to provide financial assistance to people with incomes below that level.’ Already, he pointed out, no one pays taxes on the first few thousand dollars of income, thanks to personal exemptions and deductions. Most earners pay a fraction of their “positive taxable income”—that is, the amount by which their earnings exceed that first few thousand dollars. In Friedman’s plan, the poor would similarly receive a fraction of their “negative taxable income”—the amount by which their earnings fell short of that level. This direct cash grant would replace all other welfare programs for the poor, which, Friedman rightly observed, were generating a huge bureaucracy and extensive welfare dependency.” (http://www.city-journal.org/2011/21_1_income-tax.html)
So exactly how would this work? Again, I refer to Sorman: “To limit the disincentive, Friedman argued, the NIT should be progressive. Say the government drew the income line at $10,000 for a family of four and the NIT was 50 percent, as most economists recommend. If the family had no income at all, it would receive $5,000—that is, 50 percent of the amount by which its income fell short of $10,000. If the family earned $2,000, it would get $4,000 from the government—again, 50 percent of its income shortfall—for a total post-tax income of $6,000. Bring in $4,000, and it would receive $3,000, for a total of $7,000. So as the family’s earnings rise, its post-tax income rises, too, preserving the work incentive. This is very different from many social welfare programs, in which a household either receives all of a benefit or, if it ceases to qualify, nothing at all. The all-or-nothing model encourages what social scientists call “poverty traps,” tempting the poor not to improve their situations.” (http://www.city-journal.org/2011/21_1_income-tax.html)
Now let’s put this theory in today’s economic market. According the 2010 U.S. Census, the Poverty Threshold for a family of 4 with 2 children is $22,162. (http://www.census.gov/hhes/www/poverty/data/threshld/index.html) For the sake of argument, let’s say the median income for this particular group is set at $25,000. So, if a family of 4 with 2 kids makes no income at all they will get a 50% difference of the median income which is $12,500. Not too bad for doing nothing. Let’s say this same family makes $10,000 in income, again they will get a 50% difference totaling $7,500 for a total post tax income of $17,500. One last example, let’s say the same family makes $20,000 in income, they will get a 50% difference of $2,500 for a total post income of $22,500. So why is there only a 50% difference? As explained, it would give incentive for one to work because the more you work, the more post tax income you have. There has to be a percentage of median income set so as to provide this incentive. An additional incentive would be that there would be no more social programs, such as food stamps, for one to fall back on if they don't want to use their talents to get a job and work.
We’ll, what about health care? Sorman’s Article goes on to say that one of two things could happen. One would be to keep Medicare and Medicaid in place and give a less NIT. The other, which I like the best, would be to offer Health Care Vouchers, much in the same way that School Vouchers work. Why not make the insurance companies compete with each other? Let people go across state lines and offer them vouchers for the most affordable and best health care options? The school voucher program does work in the sense that schools are more competitive with each other. Just look at the paper and you will see the many advertisements from schools who want your kid as their student. It helps keep the schools accountable for their work. I’m sure this could work with the insurance companies. Vouchers could apply to a Government Healthcare plan as well if one makes a CHOICE to enroll in one.
Okay then, what about food? This is where the NIT is brilliant in its thinking. You make the individual responsible for their choices. Yep, the individual has to choose what they are going to do with post median income that they are going to get. Are they going to go out and buy a new big screen TV and video game system? Or are they going to save the money for future food purchases for their family? And when they buy the food, are they going to buy that six pack of beer for themselves? Or are they going to buy a few gallons of milk for their kids? Responsibility is the key in this case. Something that many American’s need to re-learn.
What about those who can’t work? For those who are disabled and can’t work, I believe it will have to be approached on a case by case basis; and most likely for these individuals, some kind of voucher and median income program will have to be set in place. Why? Because these are the individuals who will really NEED the help. However, they will have to prove that they are really disabled to qualify. This is the only exception that I can see here for the NIT.
Lastly, the NIT will take care of many other issues that face our country. I’ll just hit on the issue of how the NIT will effect Illegal immigration. According to Sorman’s article: “The NIT would reduce illegal immigration, too. Managed by the IRS, it would apply only to citizens and legal residents, and since it would eliminate welfare programs, aliens would have less incentive to cross the border illegally for government benefits (though local authorities would still have to decide whether to grant them access to schools and hospitals).” http://www.city-journal.org/2011/21_1_income-tax.html What a deterrent! And it doesn’t even involve the Border Patrol.
From what I see if the NIT was established, the Dems will get their tax raises because those who make money above the median income will be taxed at a progressive rate, which is something they really like. The Reps will get their savings because social welfare programs will be very much diminished, if not shut down, as well as government bureaucracy. Now, I'm no economist but, I guess the whole budget issue is that we are so stuck in our current way of thinking that we ignore other alternatives that may be out there for us to explore. Don’t get me wrong, the NIT would need to have some tweaking done to work, but to me it seems like a good theory to try at this time.
Sources:
http://www.city-journal.org/2011/21_1_income-tax.html
http://www.census.gov/hhes/www/poverty/data/threshld/index.html
