Negative income tax

Negative income tax or NIT, in simple terms, is when people with income below a certain level
will receive money from the Government.

Milton Friedman, a distinguished economist, introduced the idea of negative income tax in his
book "Capitalism and Freedom" with a desire to alleviate poverty in 1962. U.S. and Canada
conducted 5 NIT experiments from 1968 to 1982. The results show a general behavior in most
of the workforce that they will not show up at work by two to four weeks per year because they
will get compensated by the Government.

Capitalist Party of South Africa (ZACP), known as the "Purple Cow" Party, proposed NIT last
year in 2019. ZACP proposed an income threshold of 78000 Rands/year with a tax rate of 50%.
Let us see the basic feasibility of this plan.

Figure 1 ZACP Logo (Source Google)

Suppose we draw a graph with income per annum in Rands on the X-axis and Benefit of NIT
as a percentage of income on the Y-axis. In that case, we can see the inequality of the gains.
The graph suggests that People with an income of lesser than 20,000 Rands are getting way
more benefits than those earning more than that.
 Figure 2 Relationship between Income per annum and NIT Benefits

The negative income tax aims that nobody lives in a destitute but let us scrutinize the feasibility
and potential adverse effects.

1. According to Robert Pozen, Senior Lecturer at MIT Sloan, Negative Income tax may be a
significant step to mitigate poverty. Still, the Government is not prepared to provide cash to
everyone below a certain earning level. That will make the plan impractical.

2. Another problem is competition by welfare systems. The welfare systems developed by

governments provide relief packages to eligible persons in the form of cash and in-kind
benefits, and it is more feasible than NIT.

3. Unethical conduct is one of the biggest problems that India might face if we apply NIT.
Integrity is a must, and transparency of income proofs is one major obstacle that India might
face.
To get detailed insight into the Negative Income Tax, we will now refer to experiments
conducted by different Governments.

• Richard Nixon, former president of the USA, introduced the Family Assistance Plan at the
early stage of his presidency career. The central idea of his initiative is NIT. According to the
plan, families with children with payments declining as a function of earnings will get
guaranteed money. His plan failed miserably.

• The U.S. and Canada conducted another experiment between 1968 and 1982 that we talked
about earlier. They tested negative income tax through a series of five different social
experiments. These experiments were not useful as they should be, according to Angrist.
Experiments were complex, and there were too many treatment arms. All those factors reduced
statistical power. Also, the strategy of collecting data was inefficient, and social scientists
found many misreported incomes. The accuracy of the data was a significant factor in the
ineffectiveness of their experiment. Some results suggest that the tendency to work reduces to
a moderate level, especially for the primary income earners. Data indicate that people worked
less for two to four weeks a year and that it is for educational purposes for most people.

• Another surprising result of the NIT experiment is the increased rate of divorce. There is no
reasonable explanation of the relationship, but it is not suitable for the policy's political
economy. Family dissolution should not be a side effect of reducing poverty. Overall social
scientists did not have a proper conclusion of this policy because of the complexities involved.

After looking at all these factors, we can conclude that there is no reliable evidence suggesting
NIT's feasibility. It does not mean that the idea of NIT faded away. As future leaders, we can
design a framework and implement the policy to make changes and reduce poverty without
any adverse effects.

Parth Patel (9409444286)

Indian Institute of Management Udaipur