Negative income tax - better than welfare?

By Ellis Asher

Image Credit: Ellis Asher

Before we can ask if negative income tax (NIT) is better than a liberal welfare system like the UK’s, we have to first ask what actually is negative income tax?

Often confused with Universal Basic Income (UBI), NIT is a system originally proposed by Dame Juliet Rhys-Williams in the 1940’s, as part of a plan to stop families from falling into “the welfare trap”.

If implemented, the system would replace all other welfare systems and provide a single payment that would supplement the income of low-paid workers, below a chosen threshold at a varying rate until the effect reversed.

The idea of using a varying rate would mean that the individual would never be punished for earning more money, thus incentivising continued skilled employment.

A variant of NIT, like the one proposed by Milton Friedman, is theoretically very popular. It has promise to cut down on bureaucracy, and would directly help redistribute wealth to those who are genuinely disadvantaged.

However, both the political left and right seem to be mutually undecided on NIT.

NIT has one key difference to the existing liberal systems, the cut to administration. This is where UBI is seen as a spiritual successor to NIT, for the same reasons.

NIT deals exclusively with a person’s income, there are no assessments or supervision, and the actual cash value is given directly to the person to spend how they deem fit.

This raises the issue of welfare assessments.

The existing system still requires an assessor to decide if a person is genuinely disadvantaged or not.

Famously, NIT’s biggest advocate, Friedman, viewed this as a way to remove racial discrimination from the welfare systems of the 1960’s, mentioned in his 1968 “Firing Line” interview.

Doing so would not only remove the room for discrimination but would also save the money from cutting out the assessors and assessments.

But does this make NIT’s welfare too available?

Whilst it would incentivise climbing the economic ladder, it does very little to disincentivise bad spending habits. Whereas some liberal welfare systems deduct money to directly go to basic needs like housing and bills, NIT would provide the individual with the direct responsibility for their actions.

The system has great potential, maybe one day it could replace welfare, and it would almost certainly have a different effect, but not any time soon.