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Against the Negative Income Tax



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The Manhattan Institute’s City Journal is a reliably excellent magazine, and the current issue is no exception. I found myself disagreeing, however, with Guy Sorman’s article arguing for a Negative Income Tax (NIT).

The NIT, in plain English, is a government-guaranteed minimum level of income. Sorman makes the classic argument that the biggest advantage of the NIT is that it would eliminate almost the entire welfare bureaucracy, and the tangle of often counter-productive programs that go with it. He dismisses the obvious commonsense objection — that the prospect of a lifetime income for doing nothing might discourage people from slapping the top of the alarm clock every weekday morning at 6 a.m. and going to work — with the argument that the NIT could be made progressive in a way that would theoretically encourage work as compared to the current welfare system:

Say the government drew the income line at $10,000 for a family of four and the NIT was 50 percent, as most economists recommend. If the family had no income at all, it would receive $5,000—that is, 50 percent of the amount by which its income fell short of $10,000. If the family earned $2,000, it would get $4,000 from the government — again, 50 percent of its income shortfall—for a total post-tax income of $6,000. Bring in $4,000, and it would receive $3,000, for a total of $7,000. So as the family’s earnings rise, its post-tax income rises, too, preserving the work incentive. This is very different from many social welfare programs, in which a household either receives all of a benefit or, if it ceases to qualify, nothing at all. The all-or-nothing model encourages what social scientists call “poverty traps,” tempting the poor not to improve their situations.

Sorman goes on to reference the famous (among nerds) series of randomized experiments in the 1960s and ’70s that tested the effects of the NIT on labor-force participation. He says that the results of these experiments were “fuzzy,” but that the first of the experiments showed that the unemployed people who received the NIT grant were “likelier to try to get back to work.”

Sorman is wise to look to these tests of the theory. The power of randomized experiments is that they provide the scientific gold-standard method for cutting through the tangle of correlations inherent to these kinds of social questions to create a definitive answer to the question of the causal effects of a tested program on a measured outcome. But I believe his interpretation of the NIT experiments is incomplete, in ways that are fundamental to his argument.

There were four large NIT experiments conducted in the U.S. between 1968 and 1980. These tested a wide variety of program variants among the urban and rural poor, in better and worse macroeconomic periods, and in geographies from New Jersey to Seattle. There was, and is, a lot of scholarly debate about many of the experimental results, and their potential application to policymaking. But there are two consistent findings across this body of experiments.

First, the tested NIT programs reduce number of hours worked versus the existing welfare system. Directly contrary to how I understand Sorman’s claim that the New Jersey–Pennsylvania experiment showed that the NIT made recipients “likelier to try to get back to work,” this reduction in labor hours was primarily caused by workers remaining non-employed longer if and when they became non-employed.

Second, the tested levels of progressivity of implicit tax rates did not get around this problem by encouraging work, as Sorman’s theoretical argument asserts they should. See, for example, Robert A. Moffitt (the subject-matter expert cited by Sorman), who has written extensively about why the NIT experiments showed that “lowered tax rates had essentially no effect on labor supply.” Moffitt has, in fact, written a series of papers trying to show why even the theoretical argument that implicit tax progressivity would encourage work was incorrect.

While generalizing from experiments to broad policy is always complicated in social science, true randomized experiments confirm common sense: When it has been put to the test, the NIT reduced work effort.

There was a further series of about 30 welfare experiments done around the time of the welfare debates of the early 1990s. These tested many ideas for improving welfare. What emerged from them was a clear picture: work requirements, and only work requirements, could be shown experimentally to get people off welfare and into jobs in a humane fashion. (I’ll have a lot more about this in the upcoming book.) These experiments were an important input into the central tenet of welfare reform — work requirements — which was one of the greatest conservative domestic policy successes of the past 20 years. It moved us in exactly the opposite direction of the permanent, lifetime dole of the NIT.

But what about the argument that there is an important benefit — namely, the elimination of the welfare bureaucracy and the dog’s breakfast of “food stamps, public housing, Medicaid, cash welfare, and a myriad of community development programs” that according to Sorman’s article accounts for $522 billion of annual federal spending? #more#This is extremely unlikely.

By analogy, the debate in global-warming circles sometimes pits a “simple, efficient carbon tax” against the politicized mess of the cap-and-trade bill that emerged from Congress. But in that case, the real difference is not that between a theoretical carbon tax and a theoretical cap-and-trade system; it is the difference between an academic idea that has not yet been subjected to lobbying and legislation, on one hand, and real laws that are the product of a democratic process, on the other. In the same way, there is nothing inherent about an NIT that will prevent Congress from creating thousands of pages of special rules, exemptions, tax expenditures and so on, that are collectively just as convoluted as the current welfare system. After all, “tax each person a given fraction of income” is a pretty simple idea too, but look at the 2011 federal income tax code.

And the likely maintenance or reemergence of the functional equivalents of many of these programs isn’t just the result of cynicism, but of healthy intuitions of natural justice that are essential to maintaining a well-functioning political order. As one example, do we really think it’s a good idea to further disconnect work and income? As another, if part of the motivation for giving adults income is that they spend it supporting their children, would we really allow parents receiving taxpayer money to spend it any way they want with no requirements for child welfare beyond child abuse laws? And as another, a huge portion of the costs of the list of programs Sorman provides is health care. Suppose we gave every adult in America an annual grant of $10,000, and some person who did not buy health insurance with it got sick with an acute, easily treatable condition. Would we really bar them from any urgent medical care and just say “Tough luck, but it’s time to die”? Even if you think this would be a desirable public policy, it’s not plausible that the existence of an NIT would somehow change the political calculus enough to make it substantially more of a reality than it is today.

Inevitably, and justifiably, the taxpayers who will have to work more overtime, take shorter vacations, and eat out less in order to come up with the taxes to pay for an NIT or any other welfare system, will demand some degree of accountability from the recipients; which will, in turn, require monitoring, enforcement, adjudication, and the other manifestations of a welfare bureaucracy. As I put this in a recent article in National Review:

This basic idea arose again and again during the 1960s and 70s. Examples of such proposals advanced by the political right and left included Milton Friedman’s negative income tax (1962), Robert Theobald’s guaranteed income (1965), James Tobin’s guaranteed income plan (1965), R.J. Lampman’s subsidy plan (1967), Edward Schwartz’s guaranteed income, the negative income tax plan of President Johnson’s Income Maintenance Commission (1969), President Nixon’s Family Assistance Plan (1969), George McGovern’s $1,00-a-year plan (1972), and HEW’s Income Supplementation Plan (1974). This idea constantly arises even today in academic discussions, and is being pursued seriously by the current coalition government in the U.K. The key reason we haven’t implemented such a scheme in the U.S. is that we are afraid that many of the recipients will not work, and then blow the money on Cheetos, beer and big-screen TVs. In more academic language, the moral legitimization of the welfare system requires that the recipients earn and then use this money in support of a way of living that comports in some rough sense with the idea of the good life held by taxpayers who provide the funds.

The NIT is a fascinating and useful thought experiment, but it’s not a practical public policy.



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