Thursday, March 03, 2011

Efficient Welfare Payment

One of the mainstays of libertarianism is that government assistance to the poor decreases economic efficiency in two ways. One, by giving only to the poor, it incentivizes being poor. Two, by paying the poor, you must tax the rich, thereby dis-incentivizing being rich. However, I'd never considered the negative income tax popularized by libertarian icon Milton Friedmen. It starts with a flat tax, at say 25%. Everyone, rich and poor pays the same percentage. Then, a minimum income is established, at say $10,000.  Everyone, rich and poor gets the same $10,000 from the government. It's easier to pay taxes (which now costs hundreds of dollars per person just to file). It's easier to enforce (there are more people in the IRS's tax army than in Iraq). It's more equitable to both the poor and the rich. Here are a couple of examples using different incomes and my numbers of $10,000 and 25%:

Income earned: $0
Taxes paid: $0
Minimum income: $10,000
Total amount: $10,000

Income earned: $30,000
Taxes paid: $7500
Minimum income: $10,000
Total amount: $32,500

Income earned: $100,000
Taxes paid: $25,000
Minimum income: $10,000
Total amount: $85,000

Income earned: $1,000,000
Taxes paid: $250,000
Minimum income: $10,000
Total amount: $760,000

Freidmen supported this idea, but only as a replacement for the current income tax and welfare system. For joint households the credit would be double and there could be an amount given per child, say $5,000. The minimum income credit could also be given in monthly increments so as not to require much money management.

This was part four of my series against self-verification.


  1. Actually, I think your example here would more accurately be described as a lump sum subsidy on income. With a negative income tax, the government sets some income threshold, say $25,000, and a negative income rate, say 10%. Any family earning below this threshold level gets a check in the amount of the difference between the threshold and their income times the tax rate. So a family earning $20,000 would get a check for ($25,000-$20,000)*.1=$500 for a total income of $20,500. So the further below this threshold level (i.e. the poorer you are) the larger is your tax credit, hence the term negative income tax.

    From an efficiency standpoint, your example would probably be even better than a negative income tax.

  2. Oh gotcha. Yeah I think I like what I described better.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.