NCPA - National Center for Policy Analysis

Assisting the Poor While Preserving Work Incentives

January 26, 2011

As Republicans in power work to create a strong, affirmative agenda, they would do well to revisit a policy proposal devised by the late Milton Friedman, say Guy Sorman, a contributing editor at the Manhattan Institute's City Journal.

In his 1962 book "Capitalism and Freedom," Friedman acknowledged that some form of welfare was necessary in capitalist societies; the trick was to improve it.  His answer was the negative income tax (NIT).

As Friedman 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, says 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.

Yet another NIT advantage is a freer labor market.  No minimum wage would be necessary, since a minimum income would now be guaranteed, says Sorman.

Source: Guy Sorman, "Why Not a Negative Income Tax with Cash Subsidies to the Poor?" Investor's Business Daily, January 20, 2011.

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