NEGATIVE INCOME TAX

Whenever the government chooses a system to collect taxes, it affects the distribution of income. This is clearly true in the case of a progressive income tax, whereby high-income families pay a larger percentage of their income in taxes than do low-income families. As we discussed in Chapter 12, equity across income groups is an important criterion in the design of a tax system Many economists have advocated supplementing the income of the poor using a negative income tax According to this policy, every family would report its income to the government. High-income families would pay a tax based on their incomes. Low-income families would receive a subsidy In other words they would pay a negative tax.

For example, suppose the government used the following formula to compute a family’s tax liability.

                                                  Taxes owed = e/3 of income) – $10,000.

In this case, a family that earned $60,000 would pay $10,000 in taxes, and a family that earned $90,000 would pay $20,000 in taxes. A family that earned $30,000 would owe nothing. And a family that earned $15,000 would “owe” -$5,000. In other words, the government would send this family a check for $5,000 Under a negative income tax, poor families would receive fmanciaf assistance without having to demonstrate need. The only qualification required to receive assistance would be a low income Depending on one’s point of view, this feature can be either an advantage or a disadvantage On the one hand, a  negative income tax does not encourage illegitimate births and the breakup of families, as critics of the welfare system believe current policy does. On the other hand, a negative income tax would subsidize those who are simply lazy and, in some people’s eyes, undeserving of government support One actual tax provision that works much like a negative income tax is the Earned Income Tax Credit (EITC). This credit allows poor working families to receive income tax refunds greater than the taxes they paid during the year. Because the Earned Income Tax Credit applies only to the working poor, it does not discourage recipients from working, as other antipoverty programs are claimed to do. For the same reason however it also does not help alleviate poverty due to unemployment, sickness, or other inability to work.

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