What is the Negative Income Tax?

Taxation and welfare are, perhaps, two of Canada’s most contentious economic issues. In fact, popular discourse suggests that one’s stance regarding taxation and welfare serves as a litmus test for basic philosophical predisposition. Repeatedly, for instance, talk of a ‘negative income tax’ appears in the national conversation. The dearth of economic and political understanding about what this entails, however, typically results in its dismissal.

Well, what is the negative income tax (NIT)?

In essence, the NIT is a subsidy that roughly equals jurisdiction’s poverty line. Low-income individuals, for instance, would receive a net payment and those earning larger incomes would contribute a net payment. This implies that the benefit would equal the contribution at some level of income between the lowest and highest quintile.

Imagine a situation in which everyone over the age of 18 receives a basic income of $20,000, above which the tax rate on earned-income is 50%. That is, the government taxes $0.50 for every dollar earned in addition to the benefit. Someone earning $10,000 a year, for example, would pay $5,000 in taxes, after which the level of basic income would decrease to $15,000 and their total income would amount to $25,000. The tax effect on someone earning $40,000 a year is neutral, such that the amount of taxes levied would equal the amount of the basic income.

The moment an individual’s income rises above $40,000, however, they cease being an NIT-recipient and, instead, begin contributing to the government’s coffers. As demonstrated by the hypothetical above, the NIT is progressive, despite the 50% flat tax rate on additional income. For instance, someone earning $60,000 would contribute $30,000 in taxes, for a total annual income of $50,000, whereas someone earning $80,000 would contribute $40,000 in taxes, for a total income of $60,000. The respective taxes rates in each case are 16.6% and 25%.

For the mathematically inclined, the formula for total income is I=(b+[n*f]), where b represents the basic income, n represents earned-income above b, and f represents the flat tax rate that applies to n. The formula for the effective tax rate is T={[b+(n*f)]+n}*{-1}/n.

Such a policy is not without a history in Canada. In the 1970s, for instance, the federal government and the Manitoban government joined forces and implemented a trial NIT in Dauphin, Manitoba. The experiment, dubbed Mincome, observed the NIT’s effect on labour markets, poverty, and several additional economic variables. Unfortunately, however, Ottawa did not conduct an impact-assessment and Mincome’s valuation depends on anecdotal evidence.

Additionally, the 1985 MacDonald Commission proposed a pseudo-NIT–the Universal Income Security Program–which would have replaced a swath of federal and provincial welfare programs. Nevertheless, policymakers dismissed the recommendation.

In any case, the NIT implies fewer harmful disincentives to work than current taxes, welfare programs, and regulations. Furthermore, the NIT would allow the federal government to scrap a number of existing policies that create unintended consequences, foster equitable outcomes, and alleviate poverty. In future entries, I will make a normative case for this policy using the blueprint established in this piece and show that implementing a NIT is not only recommendable, but also feasible in the Canadian context. 

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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