What is negative income tax?
The Negative Income Tax (NIT) is an alternative to the welfare suggested by, among other supporters, the economist Milton Friedman in his 1962 book Capitalism and freedom. Supporters of the NIT argue that every American with no income above the tax threshold should have a basic income guarantee and that the NIT is a way to subsidize the needy at a lower cost than the welfare system.
Negative income tax explained
To get a negative income tax subsidy, the needy should, along with other taxpayers, simply file tax returns. The IRS computerized system could then quickly and objectively identify taxpayers whose income is below the threshold as eligible for assistance.
Proponents of NIT viewed negative income tax (NIT) as a mirror image of the existing tax system where tax obligations of taxpayers above the threshold vary positively with income according to a schedule of tax rates; and the tax advantages of taxpayers below the threshold vary inversely with income according to a negative tax rate (or reduction of benefits) scale. Taxpayers with income above the threshold would pay taxes equal to the difference in cash (“positive taxes”) and Taxpayers with income below the threshold would receive NIT refundable credits in equal cash unlike (“negative taxes”).
Opponents of NIT applying economic theories of labor supply feared that the income tax promise (NIT) of a threshold income guarantee would force the working poor to work less or give up entirely to replace leisure activities, since wages decrease but cannot exceed the guarantee, in particular after the abolition of wages and income taxes of the States and local communities. If too many working poor succumb to this income and substitution effect, the growing number of needy people with an income below the threshold and eligible for refundable NIT credits would make the total negative costs of income tax (NIT) untenable.