The Negative income tax reference article from the English Wikipedia on 24-Apr-2004 (provided by Fixed Reference: snapshots of Wikipedia from wikipedia.org)

Negative income tax

A negative income tax is a method of tax reform that is popular among economists, but has never been fully implemented. It was developed by United States economist Milton Friedman in 1962. It is commonly used as a method of implementing a guaranteed minimum income system.

A negative income tax would replace the current progressive income tax system used throuhgout most of the western world. This would be replaced by a flat tax of, say, 25%, but each tax payer would also be given $10,000 by the government. Thus a person earning only $4000 per year would pay $1000 in taxes, but overall would receive a net gain of $9,000 from the government. A person making $40,000 would be at the break-even point, and would neither pay taxes or receive any benefits. A person making $1,000,000 per year would pay close to the full 25% tax, as the $10,000 would count little towards relieving their tax burden.

A negative income tax solves several problems with current systems. It would eliminate the welfare trap; prevent the decrease in real wages when one moves from one tax bracket to another; and allow the minimum wage to be lowered while increasing the net income of people earning it.

A negative income tax can be but is not necessarily a guaranteed minimum income. A GMI has to provide enough money to survive on; a NIT could be as low as few hundred dollars and a 2% tax rate implemented by a city government. GMI systems also often have other major reforms, such as the elimination of the minimum wage and the ending of most current social welfare programs.

While the notion has long been popular with economists, it has never been politically feasible to be implemented. In part this is because of the very complex and entrenched nature of the current tax codes in most countries that would have to be rewritten under any NIT system.

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