In These Times - July 26, 2021

How a negative income tax works

The negative income tax has been called an ​“upside-down” income tax. Eligible individuals receive a fixed cash benefit that is reduced according to income from other sources, also known as ​“means-testing.” For instance, if the benefit provided is $10,000 with a ​“phase-out rate” of 50 percent, and a person’s other income is $12,000, the benefit would be reduced by 50 percent of this other income, or $6,000, leaving a net benefit of $4,000. In this example, any income above $20,000 would ​“zero out” the benefit.

Like the universal basic income (UBI) idea, an NIT benefits those with the lowest incomes, or no income at all.

Means-testing has provoked criticism on the Left, but it is the only way to keep the cost of a cash benefit manageable enough to fit into the federal budget. The UBI is thought to avoid means-testing, but this is incorrect. Insofar as the UBI is taxable and returned to the government in income taxes, for all practical purposes it too is means-tested.

The NIT proposed in the paper, which we’ll call ​‘ZSCGH,’ from an acronym of the authors names, is a logical extension of Biden’s CTC in several respects. One is that it’s ambitious in terms of cost — estimated at $876 billion a year — but not wildly out of sync with the scale of current budget thinking. Like the new CTC, it does not require recipients to be employed. The program would also be tax-based, pitched as a reform of the Earned Income Tax Credit (EITC), and administered by the Internal Revenue Service. And finally, it’s targeted and not universal, which is why its cost is plausible.

Problems with UBI

In all these respects, it surmounts the difficulties of popular UBI advocacy, the greatest of which is the unrealistic cost: A UBI that genuinely meets basic needs would be entirely out of bounds of existing or plausible federal budgets.

A UBI provides an unconditional cash grant to everyone. (Exactly who constitutes ​“everyone” is actually a ticklish issue, but one left for another time.) One UBI proposal for $6,000 a year — well short of ​“basic” if basic means something a person could live on — is estimated to cost $1.9 trillion annually. (When you hear about budget packages of $4 or $6 trillion, that generally means over a ten-year period. The annual amount would be a tenth of that.) Andrew Yang’s proposal for $12,000 per person would cost $2.8 trillion a year.

Sometimes UBI advocates will defend against sticker shock by cautioning that the bulk of that cost would be reclaimed with higher taxes. The biggest flaw in that argument is political: Imagine Democratic politicians’ reactions to the idea of an annual tax increase of a trillion dollars, per year.

The main economic flaw of this approach is that the so-called ​“claw-back” — which amounts to a humongous tax increase — contradicts claims that a UBI would have no incentive effects. In other words, a great part of the UBI benefit is reclaimed by the federal government though the individual income tax, and the net taxes (tax increase minus the UBI benefit) of many would rise to finance a UBI. A tax on income is said to discourage work, saving or investment, though such claims are routinely exaggerated by the Right. But the claim that the UBI escapes incentive effects altogether is another myth fostered by its advocates.

Another problem is that the round-trip of that enormous amount of money — from government to person as UBI benefits, back to the government as tax increases — would lose a lot of passengers along the way: Roughly one dollar in six owed in federal taxes is not paid on time, or ever. ...
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