Sunday, November 8, 2009

The Negative Income Tax

There are so many forms of public assistance: welfare, food stamps, public housing, social security, unemployment benefits, disability and on and on. Yet many people qualify for NONE of these.

How do you assist the long term unemployed or those that just fall through all of the cracks?
Yeah, I know, give them  "Cash For Clunkers" so they can get further in debt!  But what's the point of inducing people to buy a car when they could use assistance for more pressing matters? Oh, here's an idea, bail out the banks whose unbridled greed magnified the level of distress the country is going through! And God forbid, don't prevent unjustifiably large bonuses.

For many of us, there exists no safety net whatsoever. Personally, I never thought I'd need one. But, then see what happens when your business meltsdown and you lose a huge chunk of the value in your house. Watch your other investments get smashed and suddenly you find yourself in a place you've never contemplated. Even if we saved and now are forced to live off our much smaller IRA's or 401Ks, we're hit with a surtax on withdrawals.

The problem with most assistance is that it comes with strings or conditions that not everyone in need can meet. But a Negative Tax could be implemented with no new bureaucracy.

The idea of a "Negative Income Tax" was first suggested, to my knowledge, by the late Milton Friedman. The idea is simple. Pick a zero level, like $50,000 and if the individual or family does not show income of that amount, have the state and/or federal goverment provide a tax rebate. If that rebate amount were 25%,  and no income was received, for example, the individual or family would receive $12,500. The money would be spent anyway the recipient chooses, unlike, say food stamps or  the proposed "Cash For Appliances".

Once their earnings exceed the zero level of $50,000, they would pay taxes just as prescribed.
Of course, there might have to be certain tests to qualify, like a maximum level of wealth. However, the idea is both simple and fair.

The program could probably replace some existing but inefficient ones in existence today. "Cash for Clunkers", although temporary, reportedly cost $24,000 per car. And, there is talk that the assistance will be taxable. The Negative Income Tax shouldn't require a new bureaucracy: we already have the much beloved IRS. Other assistance programs are undoubtedly as inefficient as the "Clunkers" program was and upcoming appliance program will be.

Marko's Take

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