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Tuesday, December 28, 2010

Guest Editorial: It’s Time for the Negative Income Tax

Craig Dawkins
It’s Time for the Negative Income Tax
By Craig Dawkins

December 25, 2010

The late, great economist Milton Friedman developed a revolutionary concept in social welfare and income taxation in his 1962 book “Capitalism and Freedom.” He called it the negative income tax (NIT).  Properly written into law, the NIT would totally reform every social welfare program in America while, at the same time, reforming the federal income tax system.

Here’s how the NIT works. Every citizen over the age of 18 would receive a fixed amount from the federal government every year. (I know what you’re thinking but just wait and read on.) The tax rate on income would tax incomes at a flat rate, say 25%. The NIT would have no effect on Social Security or Medicare. At this point you are still scrunching your nose. Continue please.

Under my NIT example of a 25% tax rate, a person who earns $40,000 would owe $10,000 in taxes. But if they get a NIT of $10,000, they would have net taxes of ZERO. Only those earning more than $40,000 would actually have to pay taxes under my example. Without getting bogged down, that’s the quick and dirty on how it works. The tax rate and NIT assumptions could be modified to suit different priorities. Now for the good stuff.

 The U.S. has never needed fiscal reform and austerity measures more than today. A negative income tax would eliminate most every federal  social welfare program. It would just shut them down. With the NIT, they are needed no more. With one fell swoop, the NIT eliminates a bunch of state and federal bureaucrats. A massive reduction in the government workforce would ensue.

Social problems like homelessness, hunger, and the concern of illegal aliens acquiring social services would come to an end. If all tax loopholes were closed and a flat income tax rate adopted, government revenues would increase while net tax rates would decline for most Americans. Incentives for work would increase significantly as people would keep a historically large portion of their incomes. And people who have become dependent on government for everything they need can learn to be responsible for their own needs with the financial resources made available by the NIT.

Freedom would be enhanced as the NIT system would completely disempower the nanny-state. Big government do-gooders who seek to regulate the food we eat, the liquids we drink, the smoke we ingest, the sugar and salt content we intake, would be left frustrated and banished. People would be free to consume what they wish to consume, including hand guns.  The personal liberty robbing government agencies would be closed forever. That would be a huge step in the right direction.
But this prospect offers little for most liberals/progressives who hate the idea that people would be given resources that don’t restrict personal freedoms. They believe government knows best.  Liberals want to social engineer society by offering targeted tax reductions to manipulate how people use and invest their financial resources. And they want and need that large, bloated federal bureaucracy to power their agenda.

The NIT agitates many conservatives who, like liberals, also want to control the freedoms of Americans through the social welfare model. They like the idea of telling welfare recipients that they can’t use their aid on slot machines, alcohol, or cigarettes. Many conservatives also believe government knows best. They, just like liberals, are misguided. Some are bothered because they don’t want an income tax at all and advocate a repeal of the 16th Amendment. That horse left the barn almost 100 years ago.

The NIT would be a compromise system. Since the principle problem of the poor is the lack of money, the NIT solves that problem. It also shuts down ever growing bureaucratic agencies which use our tax dollars to lobby Congress for more and more money. The NIT also nicely deals with the immigration problem in that only legal residents would receive the NIT. If immigrants come, they come to work. No welfare. No aid. No màs! If combined with a flat income tax, the NIT would empower liberty, not perfectly, but it would greatly improve the status quo. 
Craig Dawkins is a professor of economics and finance, a policy analyst and activist for a freer society.