Negative income tax
NIT was proposed by British writer and politician Juliet Rhys-Williams while working on the Beveridge Report in the early 1940s and popularized by American economist Milton Friedman in the 1960s as a system in which the state makes payments to poor people when their income falls below a threshold, while taxing them on income above that threshold.
The withdrawal of benefits when the recipient ceases to satisfy a firm eligibility criterion is often seen as giving rise to the welfare trap.
The level of support provided to the poor by a negative tax is thought of as parametrically adjustable according to the opposing claims of economic efficiency and distributional justice.
A 1995 survey found that 78% of American economists supported (with or without provisos) the incorporation of a negative income tax into the welfare system.
He concluded that if society wished to maximise wellbeing, it should let market forces govern production and exchange and then correct the result by 'a second distribution... performed in conformity with the workings of free competition'.
Abram Bergson and Paul Samuelson (drawing on earlier work by Oscar Lange[5]) gave a more formal statement to Pareto's claims.
[6] They showed that the optimum of efficiency associated with market competition fell short of maximum wellbeing as reflected by a social welfare function only through distributional effects, and that a true optimum could be obtained if the state were to transfer income through 'lump sum taxes or bounties', where 'bounties' are negative taxes and 'lump sum' is Samuelson's term for a hypothetical redistribution with no distortionary consequences.
Hence redistribution should be pursued up to the point at which any further (non-monetary) benefits from a more equal distribution would be offset by the resulting monetary loss of economic efficiency.
A fourth factor could be added in the form of a moral claim derived from present ownership or legitimate earning.
[8] Eytan Sheshinski summarised: In various examples calculated by Mirrlees, the optimal income-tax schedule appears to be approximately linear with a negative tax at low incomes.
[9]"Negative Income Tax" became prominent in the United States as a result of advocacy by Milton and Rose Friedman, who first put forward a concrete proposal in 1962 in a brief section of their book Capitalism and Freedom.
Firstly, he mentions that the right is frightened due to the introduction of a guaranteed minimum income the poor would have a disincentive to improve their well-being.
[10] The Friedmans' writings were influential for a period with the American political right, and in 1969 President Richard Nixon proposed a Family Assistance Program which had points in common with UBI.
Milton Friedman originally supported Nixon's proposal but eventually testified against it on account of its perverse labor incentive effects.
Paul Samuelson argued in Newsweek that it was an idea whose time had come, and more than 1,200 academic economists signed a petition in support of it.
Friedman withheld his signature, possibly on the grounds that the petition did not explicitly describe the new measure as a replacement rather than a supplement to existing programs.
[17] An attempt was made to synthesise the results and provide a nation-wide estimate of the effects of NIT in the US using two plans, one with 75% and the other with 100% guarantee and 50% and 70% tax rates.
