6.5.13

A DISSENTING VIEW ON THE NEGATIVE INCOME TAX.

The most effective way to provide money to low-income people might be by way of a negative income tax.
The idea of a negative income tax (NIT) is commonly thought to have originated with economist Milton Friedman, who advocated it in his 1962 book, Capitalism and Freedom. Others, notably the late Joseph Pechman, long-time tax dean of the Brookings Institution, credited the University of Wisconsin's Robert Lampman with at least simultaneous discovery and with bringing the concept to the attention of government policy planners in 1965.

In its purest form a NIT promised a revolution in American social policy. Gone would be the intrusive and costly welfare bureaucracy, the pernicious distinctions between "worthy" and "unworthy" recipients, the perverse disincentives for work effort and family formation. The needy would, like everyone else, simply file annual—or perhaps quarterly—income returns with the Internal Revenue Service. But unlike other filers who would make payments to the IRS, based on the amount by which their incomes exceeded the threshold for tax liability, NIT beneficiaries would receive payments ("negative taxes") from the IRS, based on how far their incomes fell below the tax threshold.
Cornell's Robert Frank explains, though, that getting the outcomes right is not as easy as it looks.
Mr. Friedman’s policy prescriptions were shaped by his desire to minimize adverse economic incentives, a feature that architects of earlier welfare programs had largely ignored. Those programs, each administered by a separate bureaucracy, typically reduced a family’s benefits by some fraction of each increment in earned income. Rates of 50 percent were common, so a family participating in four separate programs might see its total benefits fall by $2 for each extra dollar it earned. Under the circumstances, no formal training in economics was necessary to see that working didn’t pay. In contrast, someone who worked additional hours under Mr. Friedman’s plan would always take home additional after-tax income.

The negative income tax was never adopted in the end, because of concern that a payment large enough to support an urban family of four might induce many to go on the dole. With a payment of $6,000 per person, for example, rural communes of 30 would have a pooled annual payment of $180,000, which they could supplement by growing vegetables and raising animals. Because these groups could live quite comfortably at taxpayer expense, there would be an eager audience for accounts of their doings on the nightly news. Political support for such a program would be difficult to sustain.

Instead, Congress adopted the earned-income tax credit, essentially the same program except that only people who were employed received benefits. One of the few American welfare programs widely adopted in other countries, the earned-income tax credit has proved far more efficient than conventional programs, just as Mr. Friedman predicted. Yet because it covers only those who work, it cannot be the sole weapon in society’s antipoverty arsenal.
That is, if the earned-income tax credit is in fact a poverty program.  In Salon, Michael Lind (via Mahablog) suggests that the credit is the latest regressive transfer to the remnants of the planter aristocracy.
Ruthless and callous as they are, the old families and nouveaux riches who make up the Southern elite don’t want their workers to starve.  On the other hand, they prefer not to pay a wage adequate for the necessities of life.   The solution favored by the Southern oligarchy is the earned income tax credit, a wage subsidy to workers that tops up a too-low wage paid by the employer.

The major champions of the EITC in national politics have tended to be conservative Democrats from the South, like the late Lloyd Bentsen, a reactionary born into the South Texas aristocracy, and Louisiana’s Sen. Russell Long.  What makes the EITC so appealing to Southern Democrats and Southern Republicans alike is that it forces the Northern and Western states, by means of the Internal Revenue Service, to subsidize low-wage businesses in the South, even as the South is using the poverty of its workforce to lure high-wage businesses from the North and West. Every penny spent on the federal EITC is a penny that Southern state governments and Southern employers do not have to spend on Southern workers to keep them from starving. By paying taxes to the federal government to fund the EITC, Americans in high-wage states are literally subsidizing the South’s job-stealing program. The progressive policy wonks who prefer a higher EITC to a higher minimum wage are useful idiots, from the perspective of the crafty Southern political-business elite.

Finally, there is the welfare state. Universal, portable social insurance programs like Social Security and Medicare increase the bargaining power of workers, by reducing the penalty for quitting a job because of poor wages or poor treatment.  If they quit, they don’t endanger their healthcare access or their retirement security. Workers with adequate social insurance are more likely — to use a time-honored Southern phrase — to be “uppity.”

Apart from a high federal minimum wage, nothing could be a greater threat to the Southern cheap-labor economic strategy than universal, standardized federal social insurance. In order to maximize the dependence of Southern workers on Southern employers in the great low-wage labor pool of the former Confederacy, it would be best to have no welfare at all, only local charity (funded and controlled, naturally, by the local wealthy families).

But if there must be a modern welfare system, then the Southern oligarchy prefers a system that allows state governments, rather than Washington, D.C., to control eligibility and benefit levels.
Perhaps so. But as the research on the negative income tax discovered, workers are also capable of migrating to higher-wage locations, or perhaps to jurisdictions with more generous public assistance.
Competition from welfare was a severe problem for the New Jersey experimenters. Many of the families in the study were actually receiving welfare benefits worth more than the experimental payments. Therefore, some experts questioned the experimenters' findings that the NIT had only a minimal effect on work incentives, and indeed questioned whether the experiment had really measured anything at all. HEW attempted to solve these problems by launching subsequent income-maintenance experiments in Seattle and Denver (SIME/DIME). These experiments more carefully integrated existing welfare programs and offered more generous NIT plans. But the generosity of most of the tested plans made them unlikely to be replicated on a national scale, and more complicated to analyze.

The Stanford Research Institute (SRI), which analyzed the SIME/DIME findings, found stronger work disincentive effects, ranging from an average 9 percent work eduction for husbands to an average 18 percent reduction for wives. This was not as scary as some NIT opponents had predicted. But it was large enough to suggest that as much as 50 to 60 percent of the transfers paid to two-parent families under a NIT might go to replace lost earnings. They also found an unexpected result: instead of promoting family stability (the presumed result of extending benefits to two-parent working families on an equal basis), the NITs seemed to increase family breakup.
Furthermore, because an earned income tax credit is portable, residents of any state are not placebound by the social policies of that state.
Robert Moffitt, an economist at Johns Hopkins University and a leading authority on the NIT, notes another advantage of the program over other forms of state assistance: “No stigma attaches to the NIT.” Everyone fills out the same forms, and no infantilizing government meddles with a household’s food, shelter, and health care, as under the current system. The NIT simply provides the poor with money, which they can use to meet their various needs. Friedman strongly believed that individuals have the capacity to promote their own interests.

Yet another NIT advantage is a freer labor market. No minimum wage would be necessary, since a minimum income would now be guaranteed. This would boost employment: as economists recognize, a legal minimum wage tends to increase joblessness by discouraging employers from recruiting unskilled labor. The NIT would reduce illegal immigration, too. Managed by the IRS, it would apply only to citizens and legal residents, and since it would eliminate welfare programs, aliens would have less incentive to cross the border illegally for government benefits (though local authorities would still have to decide whether to grant them access to schools and hospitals). “From an economist’s perspective, the negative income tax is the perfect design,” Moffitt says. “The only reason an economist would oppose it would be from a strict libertarian perspective—opposition to any kind of government-managed welfare.”
Taken together, there's little economic evidence to suggest that a relatively small negative income tax contributes meaningfully to the entrenchment of the planters' aristocracy.

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