Negative income taxes
Reader Hans van Leeuwen wrote to ask about the Negative Income Tax which is one of those concepts that always seems to be discussed in favorable terms but never makes it on to the policy agenda. The basic idea, due to (or at least put forward by) Milton Friedman is that the tax system should consist of a flat grant and tax levied at a proportional rate on all incomes. The ‘negative’ part comes from the fact that people on low incomes would get money from the government and would therefore pay negative tax.
I’m sympathetic to the general concept, but I think it’s necessary to take the whole tax-welfare system into account. The implied objective then is to make positive transfers to low-income individuals and families while giving everyone roughly the same effective marginal rate of taxation. From this perspective, as the OECD noted the other week, the big problem is high effective marginal rates of taxation for low-income and middle-income families.
This is a difficult problem because, in general, I would like to make the grant component large for families with children (a view shared by government). It’s difficult to do this, apply a common marginal rate and hold the cost to revenue of the initial grant down to an affordable level.