 Introduction
Negative Income Taxes provide people with a guaranteed minimum income and income subsidies for people on low incomes - up until a break-even point - when normal income taxation kicks in. NITs essentially are welfare benefits which are delivered through the income tax system.
Description of a stylised NIT
In normal income tax systems people often have a tax allowance - a set amount of income which can be earned without being taxed. If a tax allowance (or exemption) is 3,000, and the tax rate is set at 50%, then someone earning 5,000 will pay 1,000 in tax and receive a post-tax income of 4,000.
However, someone earning only 2,000 would have an unused tax allowance of 1,000 - the household or individual doesn't benefit from the tax allowance. Under a NIT the household or individual would be entitled to receive a payment. In this example they would receive 500 (50% of the unused tax allowance - 1,000).
There are two income levels which are important: the break-even income where no tax is paid - in this case 3,000. And the minimum guaranteed income - in this case 1,500 (if the household or individual earned nothing they would be entitled to 50% of the 3,000 tax allowance). This NIT is represented in chart 1 below.
Chart 1. Simple NIT
Contents
History of NIT proposals and pilot programmes
Tax Credits
Tax Credits in the US
Tax Credits in the UK
Further Reading: NITs
Milton Friedman, "The Case For The Negative Income Tax", National Review, 1967 US
Conservative Election manifesto 1974 UK
Guaranteed Annual Income: A Supplementary Paper, (See appendix A for a history of Basic income and NIT schemes and proposals) Canada
Negative Income Tax, Jodie T. Allen, Entry in The Concise Encyclopedia of Economics.
Politics, Economics, and Welfare Reform: The Failure of the Negative Income Tax in Britain and the United States by Leslie Lenkowsky, 1986. Buy It US/Canada UK/Europe US and UK
David Ingles, "Rationalising The Interaction of Tax and Social Security. Part 1: Specific Problem Areas. Part 2: Fundamental Reform Options" Centre for Economic Policy Research Discussion Papers 423 and 424, 2000 Australia
Extract from The Economics of Inequality, A.B.Atkinson, Oxford University Press (1975), pp 227-236 UK
Whatever happened to Canada's guaranteed income project? Derek Hum and Wayne Simpson, University of Manitoba. Canada
Work Incentives and Income Guarantees: The New Jersey Negative Income Tax Experiment, Joseph A. Pechman, and Michael P. Timpane, 1975. Buy It US/Canada UK/Europe US
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