I want to preface this by saying that I am no expert in anything related to politics, the economy, finances, social structures, etc. I am just a regular person trying to provide my personal view on these topics and that as my understanding increases my opinions may change.
So I recently had a comment on one of my previous blog posts (UBI: A Transitional Economic Tool) where invertedlogicblog proposed that Negative Income Tax or NIT would be a better, more fiscally responsible way to provide people with an income floor. I haven’t done as much thinking or research on the idea of a negative income tax as I have basic income, so I read through their article and then started reading others. Some things bugged me about NIT right away…
NIT is Cheaper?
The numbers I’m seeing for comparing a Negative Income Tax to a Basic Income only show the total cost outlay of the money that each “qualified” person would get. In a NIT solution, only those reporting incomes under a certain threshold would receive what basically amounts to a cash refund from the government to be used as stimulus and everyone in UBI would get the same amount of money no matter how much or little they made. These differences create a false narrative.
Let’s say that we have a NIT that provides $10,000 to any person making less than $40,000 per year and take away $0.50 per additional dollar earned. So at $60,000, the person doesn’t get any further “tax refund”.
So it seems like that makes NIT a great way to go because those making $60,000+ don’t get anything from the program.
Over on the basic income side, if we provide $10,000 per year to everyone, then people making $60,000 get $10,000. People making $250,000 get $10,000. So the UBI program is more expensive, right?
With a progressive tax system, the government claws back that money in the same way as the adjustment system tracking NIT payments is done. We adjust tax rates to compensate for the payouts in the system.
So for argument’s sake, we adjust the tax rates so that those at $50,000 of income ($40,000 + $10,000 UBI) don’t pay any additional tax. Then, the bracket above that is adjusted to recoup a certain percentage of the UBI payout until at $70,000 of income ($60,000 employment and $10,000 UBI) the person pays back the full UBI amount they receive. Thus, anyone above that point wouldn’t receive any net income transfer from the government.
Now UBI and NIT start to have similar costs.
Note: I am not saying that any of these numbers are the right way of building out this system. I’m using simple numbers for easy comparisons.
Update: My wife wanted more commentary on this part… So I’ve added the next few paragraphs.
Another big thing that people talk about is giving money to the wealthy and how that is dumb. I get it. It does seem dumb to give to people that don’t need it, but if UBI deposits are managed/executed by computers since it is universal on reaching adulthood, then it doesn’t matter how many payments are sent out, that doesn’t create additional administration burden and since the money comes back through taxes, it doesn’t create a true financial burden on the system.
Also, people talk about the rich avoiding taxes or creating systems where it looks like they have no income so that they can pay less taxes, no taxes or even qualify for more money, but both of these systems, as well as our current one, are vulnerable to this kind of abuse. We can continue to add layers of oversight to try to mitigate this kind of tax avoidance, but at the end of the day, NIT and UBI are more about creating an income floor and not focused as much on trying to solve income inequality. Other systems and tools need to solve that issue.
One Time vs Monthly
A Negative Income Tax typically is setup as a one-time payment to those that qualify and only after their need has been established. I think this is the greatest Achilles heel of NIT.
Say that John lost his really great paying job in October. Tax season is in April. John’s industry has been gutted for one reason or another and finding a job in the same or adjacent fields is next to impossible. He applies to minimum wage jobs, but so many of his colleagues and the colleagues of his competitors have flooded the market.
John gets some money from the social assistance programs that exist, but some turn him away because his last tax filing tells them that he should have had more than enough to save for this rainy day. John sells everything he owns that has value to make ends meet. He wants to work. He needs to work, but there’s nothing currently.
Tax season comes and John files his taxes. The government takes a look at his high earnings from the previous year and he doesn’t qualify for a refund. That Negative Income Tax that everyone is always talking about isn’t going to help John this year.
Thankfully, after maxing out all of his credit cards, and receiving very little support from the government, he finds a job in June. John was unemployed for almost nine rough months, but he made it to the other side. No thanks to NIT.
In another country, UBI has been set-up. A very similar situation occurs, where Mary loses her job in October. But this time, Mary gets a payment transfer at the start of November. Their UBI transfer. She uses it to feed herself, to continue paying rent and to continue looking for a new job.
Tax season comes around and she puts in her numbers. The government got paid taxes by Mary’s previous company at a rate that fit the expectations of her salary, so with the drop in earnings she’s had over the last three months of the year, she doesn’t owe anything additional, in fact, she is due a small refund from their yearly taxes.
Mary didn’t max out her credit cards, she didn’t have to sell everything of value to cover the gap in employment. While she did increase her debt over the year by paying for the gap between her expected lifestyle and the lifestyle that UBI could help her afford, she is able to look around at her small apartment and feel safe, comfortable and happy.
In my opinion, a one-time financial transfer has all kinds of limitations and doesn’t deal with edge cases very well. It also seems very reactionary, creating situations where people have to prove they are worthy of an income floor. This disconnect creates the potential for a negative perception towards those that are getting the Negative Income Tax.
How Do I File Taxes?
The other concern I have with the Negative Income Tax solution is that it requires people to file their taxes. While most of us think this an easy thing, thanks to the various accounting services or computer programs that we use, for those without similar resources, navigating the paperwork and terminology can be quite difficult and when mistakes can cost you the ability to get the money you need or to get more than you deserve potentially creating a situation where you can be penalized, it could end up being more messy.
Sure, under a UBI, there will be people that don’t submit their taxes and they’ll make money under the table and thus get more than they deserve, but the same issue can occur with NIT. Both of these systems don’t have a great way to address fraud or waste. That has to be expected. We can put in place various solutions and systems to reduce this to a manageable level but it can be difficult to balance protecting money and making it easily accessible for those that need it.
People Will Stop Working
Good. That should be the goal of our society.
We weren’t built to work eight hours per day, five days a week. Work should be a source of fulfillment and a source for “more”. If you want to drive a nicer car, own a nicer cell phone, have more land, a larger house, then you work, make money and have those things. But any article or person that believes we should be okay with anyone starving, being homeless, being constantly sick, or lacking the opportunity to have a reasonable quality of life is messed up in my opinion.
And if you think it is unfair that they don’t have to work, then once one of these systems in place…stop working too. Join them. I don’t care. It opens up a position for someone that wants to work. If there are a bunch of people leaving the job market and it hasn’t been completely automated or outsourced away, then competition in an industry to get qualified candidates may mean an increase in salary and/or benefits.
People always joke about no one wanting to be the garbage man or clean toilets, but if those jobs end up being high paying, very rewarding jobs with fairly short shifts, then I think people might take them on, at least until they can be automated…
I still need to do a ton more research on these topics. My understanding of them is still very limited, but I hope that this article gave you some new ideas, a new perspective to explore. I don’t have the solution for our society, but I do know that it is going to require some radical changes if we want to maintain a somewhat comparable quality of day-to-day adult life that the last two or three generations in North America have experienced.