Negative Income Tax – NIT Definition

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Negative Income Tax – NIT Definition

What Is Negative Income Tax?

The negative income tax (NIT) is a welfare alternative proposed by economist Milton Friedman in his 1962 book Capitalism and Freedom, among others. Proponents of NIT argue that every American without income over the level for tax responsibility should receive a basic income guarantee, and that NIT is a less expensive way to help the poor than the welfare system.

Negative Income Tax Explained

To get a negative income tax subsidy, the poor, like all other taxpayers, would simply submit income tax returns. The IRS’ automated system could then promptly and objectively identify people earning less than the threshold as being eligible for assistance.

NIT supporters envisioned a negative income tax (NIT) as a mirror image of the current tax system, in which tax liabilities of above-the-threshold taxpayers vary positively with income according to a tax rate schedule, and tax benefits of below-the-threshold taxpayers vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. Taxpayers with income over the threshold would pay taxes in the difference (‘positive taxes’), while those with income below the threshold would receive NITrefundable credits in the difference (‘negative taxes’).

Opponents of the negative income tax (NIT) who applied labor-supply economic theories were concerned that the promise of a threshold income guarantee would cause the working poor to work less or quit entirely to substitute in leisure activities because wages would fall but not exceed the guarantee, especially after payroll and state and local income taxes were deducted. If too many of the working poor succumbed to the income and substitution effects, the growing number of needy with income below the threshold and qualified for NIT refundable credits would make overall NIT expenses unsustainable.

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