Negative Income Tax: A Progressive & Simple Proposal w/ Benefits for All

[jduster]

I am making a proposal that the United State abandons its current tax code and adopts the Negative Income Tax as its federal tax model.

For those who don't know the Negative Income Tax would annually tax every person at the same percentage and it would give a tax deduction/reimbursement of the same dollar amount to everyone.

For example (this is just a tentative example; the numbers can be re-worked):
The variables could be 25% of income taxation + $4000 tax deduction.

In my variant of this tax, a person working full time (let's say an income of $15,000 or more) pays into this tax. People making less than that shouldn't be paying federal taxes and if they were to pay into this one, the payout of deductions would be too big to make it revenue nuetral. Welfare programs exist for welfare, but I don't suggest we have a tax system masquerade as a welfare program.

Person A makes $20,000
Person B makes $40,000
Person C makes $90,000
Person D makes $1,000,000

Person A pays $5000 (25%). Takes in $4000. They pay $1000 total in taxes and their gross income is $19000.

Person A pays 5% of his/her income.

Person B pays $10,000 (25%). Takes in $4000. They pay $6,000 total in taxes and their gross income is $34,000.

Person B pays 15% of his/her income.

Person C pays $22,500 (25%). Takes in $4000. They pay $18,500 total in taxes and their gross income is $71,500.

Person C pays 20% of his/her income

Person D pays $250,000 (25%). Takes in $4000. They pay $246,000 total in taxes and their gross income is $754,000.

Person D pays $24.6% of his/her income

This cures the bracket creep problem. For example, in our current tax code, there is a bracket from $35,000 to $80,000 (or around that range) taxed at 25% and someone making under $35,000 is taxed at 15%.

For example (this is a real life example of someone I know), Joe normally makes $34,000 at his 40-hour-a-week job. He was called for overtime, to be paid twice as much per hour, for an additional 10 hours per week. That pushed him into the next bracket and his tax rate increased by 10% of his total income (40% increase on his tax RATE).

So essentially, he only took in half of what he made during overtime, entirely cancelling out the extra money he was paid for overtime. He additional percentage he paid on his income was much higher than the percentage that his income has increased.

Someone who makes $36k pays significantly more than someone who makes $34k, yet pays the same amount as someone who makes $80k. Ridiculous.

In order to stop bracket creeping, we could make 80 different income brackets, to make sure nobody pays proportionately more. But it would never be perfectly in order and it would be way too complex.

NIT's math formula is so absolute, that a simple equation would ENTIRELY prevent bracket creeping. Because everyone has their own bracket. There are literally an infinite amount of brackets, yet they require no more math than a simple $2 calculator.

This tax proposal will appeal to both liberal and conservatives.

This tax could be applied to any type of government. A minimalist government can lower the rates, and increase the deductions to leave little profit for the government. A welfare-state government can increase the rates or lower the deductions to leave more room for welfare programs.


Liberals will like that this tax proposal is progressive. The higher your income, the higher percentage that you pay, always. Unlike our current tax code, the N.I.T. is progressive 100% of the time.

Conservatives will like that this tax proposal is simple, applies the same formula to everyone and it requires much less bureaucratic overhead.

And one more thing. To address a common criticism of this tax plan:
"Why should Bill Gates get an extra $4000 when he doesn't need it?"

This is tautological because we can adjust the rate. If we up the rate 25.1%, Bill Gates will be paying much more than $4000 extra in taxes. This criticism is more symbolic than practical.

It doesn't make sense that a person who wants the wealthy to pay more would be okay with charging him 25% and taking away the 4000 instead of charging him 25.1% and letting him keep the $4000.

Let me know what you think of this proposal. Thanks.

 

[D H]

This cures the bracket creep problem. For example, in our current tax code, there is a bracket from $35,000 to $80,000 (or around that range) taxed at 25% and someone making under $35,000 is taxed at 15%.

Someone who makes $36k pays significantly more than someone who makes $34k, yet pays the same amount as someone who makes $80k. Ridiculous.

That's not correct. Someone who makes $36K pays 15% on the first $35K. That 25% pertains only to the amount in excess of $35K, or $1000 in this example. You need to understand the difference between marginal and effective tax rates. The effective tax rate on that person who makes $36K is much less than 25%.

 

[aquitaine]

For the record you're not the first to propose this, Milton Friedman was also an advocate.

 

[FlexGunship]

Someone who makes $36k pays significantly more than someone who makes $34k, yet pays the same amount as someone who makes $80k. Ridiculous.

This is incorrect.

That's not correct. Someone who makes $36K pays 15% on the first $35K. That 25% pertains only to the amount in excess of $35K, or $1000 in this example. You need to understand the difference between marginal and effective tax rates. The effective tax rate on that person who makes $36K is much less than 25%.

This is correct.

If the tax brackets are:

• 0%: 0 - 10,000
• 20%: 10,001 - 50,000
• 30%: 50,001 to 200,000, and
• 35%: 200,001+

A person making $300,000 is taxed 0% on the first $10,000... 20% on the next $40,000, and 30% on the next $150,000, and 35% on the remaining $100,000.

This would be (0% * $10,000) + (10% * $40,000) + (30% * $150,000) + (35% * $100,000)
= $0 + $4,000 + $45,000 + $35,000
= $84,000

That's equal to a 28% effective tax rate... despite the fact that some of that person's earnings are in the top tax bracket.

Solving the same problem for $400,000 yields a total tax of $119,000 for an effective rate of 29.75%.

As a side note, if you take the limit of that formula as your income approaches infinity, you'll find that your effective tax rate asymptotically approaches the highest tax bracket but never reaches it.

For the record you're not the first to propose this, Milton Friedman was also an advocate.

Milton Friedman was a ridiculously intelligent man whose ideas are underrepresented in modern academia. In college I didn't hear one word about him... a real tragedy.

 

[Ryan_m_b]

I've heard of negative income tax as an alternative to many forms of welfare and as a means for guaranteed minimum income. With this system though I don't really see that it is a negative tax, I could be wrong here but what you're advocating is a flat taxation system with a universal fixed tax deduction rather than a negative income tax that would essentially result in a pay out to people earning under a specified amount. I.e if 10k is decided as a minimum that everyone should have a year then earning 8k would put you in a tax bracket of -25% resulting in you receiving 2k.

There are various advantages and disadvantages to this system (pro: minimise poverty, could cut/simplify welfare con: businesses have less incentive to pay workers close to the limit stratifying pay, cost could be prohibitive*) but I'm not sure why you've argued that such a system should be flat taxation as well. That seems like a mixing of two issues unless you did that for simplicity?

EDIT: when finding links to put in I see that the combination of flat tax and fixed NIT was Friedman's personal proposal. NIT doesn't require flat tax in general.

 

[BobG]

For practical purposes, we already have a negative income tax. It's called Earned Income Tax Credit.

And, yes, saying it's a welfare system masquerading as a tax system could be a fair statement.

The benefit is that there is no penalty to transitioning from welfare to a job. As a person's income increases, their EITC decreases, but the decrease in their EITC isn't as fast as their increase in income - just as tax rates on a person increase as their income increases, but the increase in taxes still isn't as fast as the increase in income (especially since you didn't quite grasp how tax brackets actually work).

 

[mheslep]

For the record you're not the first to propose this, Milton Friedman was also an advocate.

...
Milton Friedman was a ridiculously intelligent man whose ideas are underrepresented in modern academia. In college I didn't hear one word about him... a real tragedy.

The is most illustrative discussion of the NIT by Friedman that I've seen. 1968 with WFB:https://www.youtube.com/watch?v=xtpgkX588nM

 

[ParticleGrl]

Milton Friedman was a ridiculously intelligent man whose ideas are underrepresented in modern academia. In college I didn't hear one word about him... a real tragedy.

Did you take a macro-econ class? Econ 102 had three weeks on monetarism when I took it.