Anatomy of the Negative Income Tax

Manhattan Institute Scholar and author Guy Sorman has published an illuminating examination of the negative income tax (NIT) entitled "Why Not a Negative Income Tax? Replace the Welfare State with Cash Subsidies for the Poor."

The article notes that the federal welfare apparatus alone cost $522 billion in 2008, growing every year, and that does not even count all the welfare agencies and bureaus at the state and local levels. Further, as economists and other observers have pointed out, welfare has an "infantilizing" impact on recipients, because they are subjected to government oversight and direction of their food purchases, housing choices, child rearing, and many other areas of their lives.

Instead, the great economist Milt Friedman (whose ideas we have highlighted in these pages many times before, such as here and here) proposed replacing the welfare state with the negative income tax. While the concept of a negative income tax may sound shocking or confusing at first, it is actually quite easy to understand, and Professor Sorman explains it very well in his essay, and then explores its many advantages over the current welfare system.

We certainly aren't advocating an increase in the scope and power of the IRS or in levels of taxation (a subject we have covered extensively in previous posts). However, while recognizing that there is no perfect fix to any problem of this magnitude, we do believe that the concept of the NIT deserves careful consideration.

This is an extremely important subject, as the cost of the welfare state is so huge that we have previously called it "The question of our time." The costs of the welfare system are among the primary drivers of calls for higher taxes and austerity plans, both of which can act to throttle economic growth.

We applaud Professor Sorman's excellent examination of the negative income tax, and suggest that all investors become familiar with this issue.

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For later posts on this same subject, see also: