Switch To A Negative Income Tax To Balance The US Budget, Foster Private Sector Jobs, Reduce Federal Medical And Pension Costs, Fix Social Security

Before the US begins its painful political, budget balancing process of cutting its deficit and social benefit programs, the country should analyze and consider implementation of a negative income tax. Paying guaranteed income that would decrease, at a 50 percent rate, by earnings, pensions, IRA and Keogh withdrawals, etc., would solve the country's social security problems by eliminating social security payments to the wealthy, those that saved sufficiently for retirement, and those that continue to earn livable incomes after retirement.

A negative income tax would also decrease the US bureaucracy and the number of US and state employees and the associated payroll, pension and medical costs. It is a budget balancing, deficit reducing concept that needs analysis. Combined with a voucher system for Medicare and Medicaid medical costs, the entire US budget could probably be balanced without harming the poor or senior retirement. The idea certainly deserves a thorough, thoughtful analysis as a realistic, potential solution to our budget crisis.

From City Journal, "Why Not a' Negative Income Tax? Replace the welfare state with a cash subsidy for the poor." by Guy Sorman:

admits Gary Becker, a University of Chicago economist and Friedman disciple. “But if society decides that a certain level of redistribution must take place, the NIT [Negative Income Tax] is the best, the most minimally distorting, solution ever devised.” To limit the disincentive, Friedman argued, the NIT should be progressive. Say the government drew the income line at $10,000 for a family of four and the NIT was 50 percent, as most economists recommend. If the family had no income at all, it would receive $5,000—that is, 50 percent of the amount by which its income fell short of $10,000. If the family earned $2,000, it would get $4,000 from the government—again, 50 percent of its income shortfall—for a total post-tax income of $6,000. Bring in $4,000, and it would receive $3,000, for a total of $7,000. So as the family’s earnings rise, its post-tax income rises, too, preserving the work incentive. This is very different from many social welfare programs, in which a household either receives all of a benefit or, if it ceases to qualify, nothing at all. The all-or-nothing model encourages what social scientists call “poverty traps,” tempting the poor not to improve their situations.

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.”

But the biggest advantage of the NIT is that it requires the smallest possible bureaucracy to implement. The IRS already exists; it knows how to assess income statements; and, to run the NIT, it has only to take money or pay it out. No longer would the federal and state governments maintain the sprawling multiple agencies necessary to distribute food stamps, public housing, Medicaid, cash welfare, and a myriad of community development programs. Nor would they need to pay the salaries and enormous future pensions of the public employees who run all these programs. According to a Heritage Foundation study by Robert Rector, Kiki Bradley, and Rachel Sheffield, the federal portion of America’s welfare system cost a staggering $522 billion in 2008, which works out to about $12,000 per poor person aided.

Read the complete City Journal article here.