Negative Income Tax: The positive way forward

Simpler, fairer, and more direct.

For the compassionate form of capitalism I believe in to succeed, practical steps must be taken to ensure equality of opportunity.

Currently, most governments in developed countries have a welfare system, also known as a welfare state. In the UK, this welfare state helps people under various categories, such as unemployed, or disable, to get back on their feet, or to simply survive. This is done by the government giving benefits and allowances to these people. For example, if you are of working age but are currently unemployed, you may be entitled to something called the Jobseeker’s Allowance (JSA).

In the UK, the welfare state was first properly established post WWII, by Attlee and the Labour government. This first welfare state introduced many of the components of society we still see today, and maybe take for granted. The government and Beveridge , the economist who devised the welfare system, introduced comprehensive social insurance covering unemployment, retirement, and free healthcare treatment for all – in the shape of the NHS. “Every British citizen would be covered, regardless of income or lack of it. Those who lacked jobs and homes would be helped. Those who were sick, would be cured.”

Beveridge, the designer of Britain's first comprehensive Social Insurance.

Beveridge, the designer of Britain’s first comprehensive Social Insurance.

The motives behind this are to a large extent understandable. Many people can’t help their physical or mental disadvantages. For example, people born with disabilities and those who fall ill cannot necessarily find themselves to blame. In a fully capitalist society, a Darwinist system could very plausibly ensue. This “survival of the fittest” system would indeed leave those seen as physically and mentally aill unable to compete on a level playing field; on the sidelines, forgotten and discarded. For example, if these disabled or disadvantaged people are unable to have the same employment opportunities as other people, I personally see this as an unfair society. Once they have the same opportunities, it is completely up to the discretion of the employer to employ who they want most.

However, while the motives are understandable, I believe the methods are terribly misguided. The welfare system is flawed fundamentally. 64% of all families in Britain receive some kind of benefit from the government. They rely on the idea that a single government body can somehow decide what welfare and benefits over 20 million families receive. It is impossible to have a “one size fits all” benefits distribution system. This leads to many problems, for which the taxpayer (me and you) ultimately has to pick up the tab for. For example, in 2013/2014, a whopping £3.4bn of benefits was overpaid, due to claimant error, government error or benefit fraud.

This is a damning indictment of the current system, one that can only be fixed by stripping it right back down to the basics. The idea is to offer everyone equal opportunity for improvement and job prospects. This encourages dependent people to get back on their feet, and take personal responsibility for their lives instead of scrounging off government and the taxpayer’s money.

The government has already tried to simplify the benefits system, by replacing a whole host of benefits with Universal Credit, something you may have heard of in the news recently. However, the government still holds control over where your benefits go, and you still have to roughly follow how they allocated your personal budget. Furthermore, as well as repackaging a bunch of benefits into Universal Credit, they have actually reduced the total amount entitled to people who claim.

The welfare system needs to be stripped down, and eminent economist, Milton Friedman, I think has the answer: a negative income tax.

Returning liberty to the individual.

Returning liberty to the individual.

This system replaces the complicated mess of benefits by simply giving money people in need. This sum of money depends on your income and need, regardless of physical, health or employment status. Simple.

Currently, if you work for around the minimum wage on 40-hour weeks, your annual income will be around £12,000. Let’s say, for argument’s sake, we decide that is the maximum threshold to which money can be paid into someone’s account as part of the NIT, therefore the ceiling of payout value.

If we  decide to set the negative income tax rate at 50%, this means you will receive 50% of the difference between your income and the NIT threshold, on top of your income, as long as you’re earning below the threshold.
For example, if your annual income is £8,000, the difference between that and the threshold is £4,000, so you will receive an extra 50% of that difference. You are given an extra £2,000 (50% of £4,000) so your total take home income is £10,000.

At the extreme end of the scale, if you earn no income at all, you will receive 50% of the difference between £0 and £12,000, so you get £6,000 a year.

This guarantees everyone a minimum income of £6,000 a year. While some may challenge this as giving people free money without having to work, this is something the current welfare system closely mirrors too. In fact, NIT creates a better incentive for people to work or seek employment than Jobseeker’s Allowance. This is because for every extra £1 you earn, the government will top up 50p extra! Benefits rise positively with income up to the NIT ceiling. By this time a person will ideally have more sustained employment and a stable enough life that they will seek career progression themselves without encouragement from government.

The overall package NIT will provide is also worth less than the package the current welfare system provides to the average claimant. This reduces the unemployment trap where people actually receive more from benefits than if they took a low paid job, which means there is no incentive to work. With the smaller NIT package, people are encouraged to seek work, and also to work for longer hours, something which will boost self-sufficiency.

There are huge benefits in NIT as a lump sum:
• All the bureaucracy and red tape involved in the government process of trying to work out the ‘How much? When? To who?’ of benefits is removed, saving the taxpayer huge amounts of money.
• This removes the possibility of benefit frauds which unfairly take resources and opportunity from honest people in genuine need.
• By giving people in need money as a lump sum, they have freedom to spend it on areas that will help them most. Previously, these people had no choice but to rely on the government to decide what areas would help them most. This will lead to a more efficient use of resources, and reduce government wastage.

The result of all this, to me, would be a  fairer, more equitable society for people to live in, where honest work is encouraged, and economic freedom is evenly distributed.

About Jonathan Ko
Jonny is an 18 year old student from Kent with a passion for behavioural economics and current affairs. His favourite book is Nudge and he loves finding out about human behavioural biases and quirky, inventive ways to combat them. In his spare time, Jonny plays basketball and produces music, and his go to playlists are hip-hop and anything J Dilla.