Monday, December 5, 2011

The negative income tax

The great Milton Friedman died on November 16, 2006 and we all have been worse off due to his passing. Friedman was a generator of ideas and possessed great vision and instinct based on micro economics. Some have misinterpreted his conclusions in the Monetary History of the United States by contending that he criticized the Fed for not inflating the currency during the Great Depression saying that this is why the current Fed has acted in such an irresponsible manner. Not so. Friedman was an advocate of steady money growth (the Quantity Theory of Money) and disliked discretionary monetary policy as being inherently destabilizing. Thus, he was critical of the Fed for allowing the money supply to contract by one-third during 1932-1933 which caused the Great Depression. Friedman always said that if the Fed had kept the money supply at a constant level, we would have had a recession and not a depression. Now it is time for consideration of another Friedman idea, the negative income tax. Perhaps the only positive byproduct of the republican presidential race has been the uniform notion to blow up the income tax structure in the United States with either a flat tax, or a value added tax, or a combination of the two (Cain's 999). The problem with these proposals is that although they would eliminate all other federal taxes, they would leave the structure of federal income redistribution unchanged. This would change with a negative income tax. Friedman's negative income tax would be coupled with a flat tax. These would not only replace all of the federal taxes (income. FICA, and excise) but would also replace all social redistribution programs (Social security, food stamps, housing subsidies, and all welfare programs) and eliminate minimum wages as well. The negative income tax would guarantee a certain income floor for all citizens. If a person earned above the floor then in Friedman's world they would keep a set declining percentage of each dollar earned up to some maximum level of income. Then the flat tax would kick in at that higher income. The advantage of this program would be that low income earners would have a positive incentive to work because they would keep more of their income. This is in contrast to the present system of disincentives where if you work you might lose the government assistance completely. The key to the negative income tax is that the guaranteed floor (say the so-called poverty level) cannot exist for an able bodied adult regardless of incentives to work or else the slothful amongst us would opt not to work. However, for those who want to do better and to have a brighter future for their children, the system would work. Lastly, I would advocate the elimination of all government transfers period (such as tax credits, farm subsidies, and corporate welfare). It seems to me that if we really want to blow up the income tax, we might as well blow it all up.

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