The negative income tax – part 2
Posted by Vikram Balan on January 14, 2013
This is a continuation of my thoughts on this topic, part 1 being here. I have read some arguments against the benefits of the NIT system, which I lay down here, along with my thoughts against these arguments.
(1) The NIT system reduces incentives to work, since people are guaranteed a stream of income.
In my opinion, this is an argument for government subsidies in general, and not for the NIT system versus a traditional welfare benefits system. “Free benefits” (subsidies) of any form automatically create a disincentive to work and earn an income. A truly libertarian approach would oppose any form of paternalistic government involvement, but this problem of social welfare demands a solution in the form of some basic and minimal government intervention. And the best way to bring this into effect would be in the form of placing cash directly in the hands of the needy, enabling them make the decisions best suited for themselves. The NIT achieves exactly that. So, instead of the government telling me that I can spend a maximum of 50 on food, 30 on health & 20 on education, I would rather have the government (if social welfare is on its agenda) give me 100 and let me decide the split myself.
(2) Empirical evidence gathered from experiments conducted in the US during the 1960-70 period seemed to indicate that the group of people receiving direct cash benefits via the NIT system had “lesser incentives to try and get back to work” as compared to the group receiving welfare benefits via the “traditional system” (food stamps, child support, public housing, and so on).
I have my reservations on this criticism. Firstly, was the quantum of monetary benefits via the NIT as generous as that received under the “traditional system”, and if not, would this have skewed results in favour of the “traditional system”? Secondly, the timespan of this experiment. Over what period have these purported incentives been measured? Do we consider a period of few years sufficient for the benefits of a radical new system to accrue and overshadow the “more obvious” benefits of the established traditional system? Thirdly, does the part represent the whole? Can the result of an empirical test on a small population be extrapolated to the entire population? How can we be certain that this small population is representative of the entire set? How can we be certain that their personal choices will be the same as those made by the rest? Their values, family structure and choices which they deem are best for themselves – may not be applicable to or uniform across the entire population.
(3) An arithmetic deficiency in the NIT system has been laid out by Henry Hazlitt. From my understanding of this, applying numbers from the above example, Hazlitt says that a person earning zero will have an initial NIT payment of 50, which will bring his total post-tax income to 50. However, that still being below the “poverty line” of 100, a further NIT payment of 25 (being 50% of the difference between 100 and 50) will be paid out, bringing his total income to 75. And this process will repeat via a geometric progression, until the point the person receives a payment of the entire 100. Further, every 1 unit of additional income he earns HIMSELF, bumps up his overall income by only 0.5 unit, which further introduces the disincentive we discussed earlier.
The first of these, I can easily see circumvented, by making NIT an annual one-time end of the year payment, with no further geometric knock-on effects. And part two of this argument, the disincentive, exists in any progressive tax regime, where those earning higher incomes are taxed at higher brackets. The NIT payment structure, while achieving the goal of providing some social insurance, also makes sure there’s a marginal overall income benefit for those earning more by themselves (clearly workable using basic mathematics).
All in all, any scientific system meant (with the intention of social insurance) to place cash directly in the hands of those who are deemed “needy” would be preferable, in comparison to a cumbersome public distribution system like the one we have in India which could be prone to leakages. An NIT system could work!
This entry was posted on January 14, 2013 at 9:19 AM and is filed under Economic Theory, India. Tagged: direct cash transfer, government, incentives, India, negative income tax, NIT, social insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.