NIT is basically a progressive tax gradient that doesn't stop at unemployment, so the labor pools available to employers at each pay grade for every industry shift down at the low capital level and shift up at the high capital level. Basically more lower skilled people are available to work lower capital assisted jobs, this encourages employers to employ lower skilled labor at lower wages. On the flip side, we have two forces acting on high skilled labor. Now we have tons of low skilled or medium skilled people perpetually locked in low capital assisted jobs, and they aren't going to become high skilled or get assisted with more productive capital because employers are incentivized by the tax system to use these lower skill production functions
The second force is the taxes themselves, the progressive taxation problem. It diminishes labor pool availability of high skilled workers at a certain pay so that only the most highest skilled workers get employed. Basically, due to how much money is eaten in taxes, the employer has to bid at a really high rate to attract productive enough labor.
That second problem itself isn't isolated to NIT, that's just a normal progressive tax problem. It affects the whole world right now, because everyone has progressive taxes.
But those problems compound so much more when you throw NIT into the mix
Welfare served only to calm the revolutionary winds blowing in from black Americans. It has truly devastated that community.
Any proposal that even hints at reducing the size of government will fail. Since the federal government is the country's largest employer, there is ZERO political will to advance policy contrary to its own existence.
There's a lot of interesting ideas in these comments. None would ever see the light of day in Washington. Ever.
Make it $15-16K and mandate health and retirement products off of a basket of services in an exchange.
Over time, it will be less expensive, all savings for health and retirement will be individual and portable, and Medicare and Social Security will be replaced peacefully with better systems.
Allow the poor to choose the new or old system. If they choose the new, they can never go back to the old.
NIT is something that needs serious consideration as more and more jobs become automated, roboticized, and outsourced away.
Productivity is at its highest levels, goods and services are as varied and abundant as ever. We have a major demand problem, as more and more working and formerly middle-class people are being completely shut-out from the economy.
We need to delink "work" from basic survival. I know this will make the Neo-Calvinists heads explode but there is no virtue and honor in resorting to flipping burgers, and selling greasy unhealthy fast-food for slave wages.
Freedom cannot be achieved via blind adherence to the "market". Freedom does not mean the ability to choose between toiling for modern-day feudal lords (i.e. employers) or starvation. True freedom is the ability to reject demeaning and degrading work if one desires without it affecting his/her ability to provision a basic subsistence living for him and his family.
The only alternative in a world where possibly half the current labor pool is rendered obselete, that may satisfy the work fetishists, is a job-guarantee/employer-of-last resort scheme. A modern-day WPA if you will, aimed at repairing, improving, and modernizing our aging infrastructure.
Without a mechanism in place to provide a basic provisioning scheme to allow access to shelter, food, and health care....society risks a resurgence of extremist and nationalist ideologies which become the basis for social unrest, xenophobia, and warmongering. The poor and disadvantaged will latch on to any ideology which will bring food to their table.
According to the CRS, there was enough welfare distributed in 2011 to hand every household below the poverty line over $60,000. How could anyone fight the NIT when it would effectively cut costs even if we placed the theoretical number at $20,000? Those making that much wouldn't pay taxes to Uncle Sam and the poorest of the poor would receive the 50% or $10,000 a year/ $833 a month for housing, food, and life necessities. The people stating they don't want the government to give the poor money and it should be voluntary are accurate but it's politically impossible and Friedman knew that when he devised the NIT. It gets rid of operating costs to power hungry bureaucracies, ends the minimum wage discrimination, would simplify tax code if combined with an equitable flat tax or better yet a consumption tax, and eliminates stigma which is a self fulfilling prophecy. If you feel worthless then chances are you'll fulfill that label. I'm an avid Libertarian but even I realize taxation and federal aid to the indigent will be around for awhile.
Suppose that some person earns in a month €50; however he/she has no power to achieve a level of €100. We will pay following Milton Friedman NIT-negative income tax system, a half of €50, i.e., €25. Total personal payroll would be €75 in cash. Milton Friedman do not obligate the payroll €75 for taxation. But, if we leave the tax rules old way and obligate €75 for taxation, calculating all monetary and material subsidies and benefits into payroll, then, as the solution for the negative income tax implementation, we can use the 50% of the median wage income level. For instance, if the median wage is €200, then choose the poverty level determination at 50% from €200, i.e., equal to €100 like we just did above. See why the 50% of the median wage income was chosen for NIT-level at http://www.datalaundering.com/download/txdesign.pdf
"even today, after the worst economic downturn since the Great Depression, no government has openly proposed inflationary policies as a response to the slump,"
Are you joking? What the hell do you think quantitative easing is if not an inflationary policy?
NIT isn't even interesting. If I were a low income worker, I would go underground, since there would be no Medicare or Social Security to worry about, why show any income? Just work for people off the books, like many people do now. Collect NIT plus other income. A nice way to get an extra $10,000 or what ever the max is. Another reason for not giving NIT serious thought is SS and Medicare payments. Those payments support the government to the tune of Trillions of $'s. You economists live in a world of theory and the theories don't work- EVER. As Galbraith once quipped,"The only function of economic forecasting is to make astrology look respectable.
Henry Hazlitt was once a supporter but realized the NIT can not ever work. He explains why in "The Conquest of Poverty" available at Mises.org
Thank you for the excellent article, another in a long line of excellent articles at City Journal on a variety of subjects by different people.
But then I must be a realist - even though a NIT would be better than the current welfare system, the latter will never be drastically changed in this country. And I must add that simply swapping one welfare system for another will not help those who receive the welfare or those who have their income confiscated to give it to them.
Please allow me to use one of my favorite quotes:
"A government that robs Peter to pay Paul can always depend upon the support of Paul."
-- George Bernard Shaw
Currently, approximately 46% of the people in this country do not pay income tax (because they do not earn enough, because of deductions, the EITC, etc.) and it is getting worse every year. Of course, the Left's constant political rhetoric aimed at the productive, including the common, "the rich don't pay their fair share" (even though 'the rich' pay most of the taxes in this country the truth does not matter) with the media backing them up every day guarantees that the system will not change.
Why not a NIT? Because it would not change this and the Left's use of class warfare will continue no matter how we try to dress up welfare.
And why should I be forced to subsidize the poor? If you want to, fine, make some donations to charity. Or Bill Gates, or George Soros or Al Gore - let them donate THEIR OWN MONEY to charity to help the poor. I donate to food banks and a few small organizations - with my own free will!
Remember this about the Left: They're socialists with everyone else's money and capitalists with theirs!
That said, continuing to steal from those who earn to give to those who do not will simply lead to a bloody revolution when the money runs out - and it will, eventually. And that day is getting closer - one only has to look at the greater than $100 TRILLION national debt and unfunded liabilities.
Take a look at Greece. And Wisconsin. Multiply that by hundreds when the money runs out!
On the other hand, if enough of us complain loud enough, with the Tea Party being a great start, and the government finally wakes up and starts massively reducing spending, massively reducing regulations, immediately shutting down un-Constitutional departments, massively reducing taxes, etc. the economy would once again be back on its feet. A growing economy means more jobs and with more people working there are fewer reasons for people demanding welfare.
A big step to getting the economy booming again would be to completely abolish all income taxes, all investment taxes, all business taxes, inheritance taxes, etc. and go to a national sales tax with a VERY LOW percentage of approximately 2%. No exemptions. NONE. With this system, EVERY American will pay at least something and why not, doesn't everyone take advantage of living in this country? Why would anyone be exempt from paying taxes? Even if they pay only a few dollars every year because they do not spend much they are STILL contributing instead of simply being a leech. And because 'the rich' spend more, they will pay more!
Of course, the jackals in congress will scream and yell because it is far from 'revenue neutral' - but that's the point! As long as we keep sending them money they will keep spending it!
However, as I stated before, I must be a realist - neither your idea nor mine will ever be implemented. The Left and the media raise all kinds of heck when a simple reduction in the rate of growth of any program, not even a cut but a reduction in the rate of growth, no matter how small, is even suggested.
We can theorize all day of ways to stop it from happening but they'll only be theories that will never be put into practice - the government WILL run out of money, the people will riot and then ... well, you get the picture.
Regardless, thank you again for a great article, I enjoyed it very much.
"The time is near at hand which must determine whether Americans are to be free men or slaves."
-- George Washington
"The Constitution is the guide which I will never abandon."
-- George Washington
"Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others."
-- Ayn Rand
"And having looked to the government for bread, on the very first scarcity they will turn and bite the hand that fed them."
-- Edmund Burke
"When the people find that they can vote themselves money, that will herald the end of the republic. Sell not liberty to purchase power."
-- Benjamin Franklin
"To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it."
-- Thomas Jefferson
"It is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth -- and listen to the song of that syren, till she transforms us into beasts."
-- Patrick Henry
"The finest opportunity ever given to the world was thrown away because the passion of equality made vain the hope for freedom."
-- Lord Acton
"While it is possible to ignore reality, it is not possible to ignore the consequences which result from having ignored reality."
-- Ayn Rand
"Every time that we try to lift a problem from our own shoulders, and shift that problem to the hands of the government, to the same extent we are sacrificing the liberties of our people."
-- John F. Kennedy
Very interesting. This should become a topic of discussion as the new congress is discussing ways to curb federal spending.
Sorry for belated response, that sounds like an interesting idea, I'll have to give that some thought, thanks
Look the USG will have a current cash requirement of 2 Trillion dollars in FY 2011 including an estimate of off budget items.
How would you like to fund this bold new idea?
Create "credit" even faster than Bernanke is currently doing.
You US Empire is about to implode like USSR in 1989. The "poor" will be lucky they do not starve.
I still don’t like it. If it’s our goal to prevent any American from being destitute then we should offer only two forms of assistance: Corporate Welfare and Disability. I don’t mean corporate welfare in its popularly know form, I mean:
We set a minimum wage or income and if any business has labor needs but can’t afford to pay that wage it can apply for government assistance and the government after vetting the needs and qualifications would subsidize the income for that position. Disability would cover those incapable of working but now you have ever able bodied person working for their income, not to mention the economic growth, and unemployment reduction that would be produced. These businesses would actually produce something (a product or service) as well so that helps the USA too! No welfare, no Medicaid, and no any other form of assistance or entitlement. Plus if this was handled in a way that SSN’s and all were needed to be employed that cuts out the illegals, even in landscaping! Assuming the minimum income was set at $15/hr for instance a job such as landscaping could pay $15/hour 7 from the employer and 8 from the government. The money we’d lose by subsidizing employers would be made up in GDP increase, economic growth, and probably other stuff I haven’t thought of. What would be the problem with that?
Murray adds a twist....his NIT is paid out monthly. Each and every month the recipient gets another chance to act responsibly or squander his monthly stipend. If he squanders it and must go to friends or relatives they will apply social pressure to do better the following month. If Mr X fathers a child out of wedlock, his monthly stipend gets smaller by amount of child support which gets transferred to mother. Disincentive to father children out of wedlock. I think "Reason Rules" proposal has merit in that it applies to everyone. Biggest problem with all these ideas is the disimpowerment of the burocrats, social workers, etc who judge, control, and manipulate the poor in return for big government paychecks and pensions.
The primary reason that progressives oppose libertarian approachs (NIT)is that this empowers individual citizens and diminishes the power of statists & burocrats.....it is about "control". The reason conservatives oppose these approaches is that they have contempt for the poor and think they will squander the money on vices....
William Voegel, in his new book, Never Enough, defends ably the idea that conservatives must get over the modern era's slide into Welfare Statism and instead propose to reform it in a way consistent with Conservative principles. Friedman & Murray's ideas have never been picked up by conservatives but should be. They offer the best hope to provide a safety net to the poor without disincentavizing them.
Those who championed the creation of the Welfare State,rightly saw it is a temporary 'safety-net' for those who had fallen on hard times through no fault of their own, it has now become a 'lifestyle-choice' for the feckless. Most right-thinking individuals would agree that it is immoral to live by the fruits of another's labour. Under the current system, only welfare recipients can afford to have indefinite numbers of children, while responsible, married, working parents can only have the number of children they can afford to maintain themselves. Therefore it takes the taxes of several of these responsible citizens to fund the welfare dependency of one single mother - this is indefensible. However, as another poster has pointed out, no government is taking the long-term view, they don't care that their policies ensure the ultimate breakdown of society as long as they are re-elected.
Interesting idea but as happened with Britain's 19th Century Speenhamland system, a negative income tax would quickly turns into a taxpayer subsidy for employers to pay below-subsistence wages.
It helped to damp down social unrest, but the long term result was that taxpayers subsidised employers who were thus able further to drive down wages, knowing that the public purse would tend to remedy any deficiencies.
Minimum wage laws are (like the ability of hummingbirds to fly) one of those that don't work in theory but work just fine in practice. In theory, the US minimum wage of $7.25/hr is too high what with our 9.0% unemployment. On the other hand, Australia which a comparable economy in terms of per capita GDP (and whose dollars trade roughly at par with US dollars) has a $15.00/hr minimum wage with a 5.2% unemployment rate. If the US's 1968 minimum wage of $1.60/hr had been increased annually in sync with the Average Wage Index (which SSA tracks to set initial Social Security benefits), the US minimum wage today would be $14.88/hr. At this wage rate, we could eliminate both the stigma and cost of welfare for the working poor without adjusting a single means-tested welfare program (full time or even half-time workers would earn too much to qualify for food stamps, Medicaid or housing vouchers).
Since the non-working poor on welfare are already functionally on the government payroll anyway, converting welfare to a workfare system (at a generous yet still below-minimum wage level) for every able-bodied worker would be more popular politically and cheaper fiscally without creating work disincentives for employees or wage disincentives for employers. Rome wasn't burned in a day (happened at night if I remember correctly), so gradually increasing our minimum law over a number of years to Australian levels is the way to go.
This ignores the reality of how government operates. The minute you grant license to government to give money away the politicians will start using the program to buy votes and pay off certain constituencies. We would be right back where we started within a few years. The cash payments would get bigger and the incentives to work harder would be reduced.
The best policy is to stop paying money to able bodied people of sound mind PERIOD. There is no incentive that works as well as self-preservation and the will to survive. Any aid given should be temporary and administered at the state or county level. In that way the true "need" for assistance could be assessed more accurately.
The federal government is a blunt instrument, they are a complete failure at virtually everything they do. It is time to give them less to do.
In an income tax model, perhaps the NIT is the most efficient way to distribute welfare. But I wonder whether the benefits we would derive from it are sufficient to justify keeping an income tax rather than one of the other tax proposals out there. Using the NIT would lock us into an income tax regime, rather than trading it for a VAT tax, a sales tax, a property tax, or any others that have been proposed. I'm not necessarily advocating one of those, but I think we should settle that larger question first, before boxing ourselves into a particular tax structure for the sake of welfare reform, which, in my mind, is secondary.
When we add the intellectuals who will never learn to those people who have given up resisting them, we have a social program. The best social program is for government never to be in that business.
The rich will still find a way to scam the system to their benefit!
There is only one monster flaw in this idea...
A certain percentage of society doesn't work under normal monetary incentives and that percentage is highest in the lowest incomes.
This system also doesn't address low skill sets, disability, high unemployment cycles, ect...
I don't see it as any better a solution due to the extreme theory of the process and no natural development anywhere in society.
This is cool that people are able to get the home loans and that opens up new possibilities.
Finally, consider capital gains, inheritance and corporate profits to be simple income and apply this formula to them as well.
Fair, even, everyone treated the same for as long as they live.
Now, we're talking!!
Correction to the formula I just posted (why can't I edit it?)
Net Income = Gross Income + (Minimum Income - Gross Income) * factor
Gross Income = $80,000
Minimum Income = $50,000
factor = 0.5
Net Income = $65,000
The NIT is a fascinating concept, but to be workable and fair it would need to be applied all the way up the income scale; that is, the formula would be the same for everyone:
Net Income = (Minimum Income - Gross Income) * factor
Also, realism must apply to determining the Minimum Income such that no family had to live below a workable level. For the poorest to survive, for instance, they would need $25,000 minimum, and with a factor of 0.5 (as the article suggests) that would set the Minimum Income at $50,000.
Do this, eliminate other social assistance and all tax deductions, and you just might have a real tax system.
I love the NIT idea and it sounds trivial to administrate. My understanding is that most welfare recipients get a mix of benefits from different programs and that each program counts a dollar earned against the benefit. So if they are on 3 programs, which I hear is typical, they lose 3 dollars of benefit for every dollar they earn. The NIT solves that program, but subtracting from a maximum rather than each program. I see 2 manageable problems with the NIT. One implementation in a situation like the hubby leaves one day and never returns. Would the housewife file quarterly estimated taxes to get her benefit? Also what incentive is there to stop receiving it? I wonder about a delay between a hike in wages and a decrease in benefit. So if you get a job or a raise, you get a bonus. To help persuade people, maybe have the benefit go down every month by something trivial like a dollar.
On a side note, I don't understand why when the minimum wage goes up, don't welfare agencies get their budgets cuts? Also why are some people so upset when workers for a certain large retail corporation get welfare. Isn't it a sign of success for the program?
Regrettably I must agree with George Shultz."A brilliant but unworkable
idea". Does anyone have Obama's take on the NIT. As he told Joe The Plumber, "The wealth needs redistribution". This would do it. And a great
chance for Obama to leave a real legacy. The end of welfare as such. He
of course would want it extended to 'undocumented persons'.
The way to handle Howard's suggestion is, perhaps, to ask in what way an individual who can't handle cash grants competent to handle his own life? Probably he needs more structure than grants or even programs can give him.
And he's probably unfit to have charge of children.
If government programs to assist low-income individuals and families with food programs, healthcare insurance, and other forms of non-cash assistance are replaced with all-cash grants, I will sell my house, take the money, and buy a liquor store in the most depressed urban area I can find. And rent from the state a licensed state lottery machine. I will be a millionaire in two years, if not sooner.
And the poor folk in town will still be poor. With lots of empty liquor bottles lying around and a stack of losing lottery tickets.
Bad idea, bad, bad!
Anything the government subsidizes, grows. The only government policy which would reduce the moral damage caused by welfare would be to lower the payments - cash or in kind - over time. Combined with the announcement that there will be no more after 20xx, that will restore the only practical and cost-free incentive for people to learn in school, to work, to teach their children to behave in a sensible way and avoid all sorts of self-destructive behavior. That incentive? You have to pay for what you do, yourself. Not your neighbors, not the county, not the state, not the Federal government. You, personally.
Friedman's premise was that state welfare by another name is better for society than no state welfare. Empirical evidence doesn't support this premise.
No politician in his right mind would implement a current fix when it could be postponed for the next generation to solve. Where would the dontions for the next election come from? Every one would be too angry to contribute except to charlatans who promise a quick-fix if elected. PolySci 101.
“No stigma attaches to the NIT.”
No stigma attaches to illegitimacy these days. How's that working out for us?
The government is not capable of simply handing out money to people without corruption and gross incompetence. Since the IRS rarely audits small returns, EITC is free money for fraudsters, and the NIT would be even worse.
The primary driver of welfare is culture, not economics, and it is only there that a solution lies.
"According to the IRS upward of 30% of EITC payments, +$10 Billion is fraudulent to filers claiming unqualified children."
First, I would like "JTR" to provide the source from which this statement was derived.
Second, as a former tax accountant, its hard to claim children on your return that's not yours because those children are being claimed by their own parents. The IRS has a mechanism in which dependent SSNs claimed on duplicate returns are rejected. If anything, the real problem is SSNs being stolen by illegal immigrants.
I couldn't agree more that we need to refocus the debate on bold ideas.
Since health-care vouchers were dismissed as part of the The Patient Protection and Affordable Care Act ('Obamacare'), and school vouchers are universally opposed by the education lobby and teachers' unions, what is needed is leadership in for the long haul.
Our current political establishment doesn't seem to be able to focus on anything past the next election, regardless of party.
According to the IRS upward of 30% of EITC payments, +$10 Billion is fraudulent to filers claiming unqualified children. The NIT doesn't appear to address this fraud, unless the savings by eliminating the other programs is sufficient to live with this level of fraud.
Mr Sorman writes: "no government has openly proposed inflationary policies as a response to the slump, as would have been common in a pre-Friedman universe."
Really? What else could one call the deficit and stimulus spending of the Obama administration. And what about 'quantitative easing', the simple printing of money? Anytime government creates money from air, whether to pay debt or for feel-good reasons, it is inflationary.
Because Liberals believe that government must meet the poor's demand for access to the public purse, and Conservatives believe they must respond with their own plan to meet this hypothetical 'need', does not mean benevolence is a legitimate use of government.
The NIT is something for nothing at the expense of those who work. People need jobs for dignity as well as support. Get government out of the way and let the creative and productive impulses of the market create them.