The case for a Negative Income Tax — January 20, 2012

The case for a Negative Income Tax

I thought I’d start my return to blogging starting with a radical idea that I’d like to see in British Politics.

The Negative Income Tax is a theory which would partially abolish the welfare system and would simplify the tax system. Originally devised by Juliet-Rhys Williams, a then member of the Liberal Party in the United Kingdom, it was further expanded by economist Milton Friedman. The concept became a popular theory when Friedman added a flat tax component to the original idea in his work The Constitution of Liberty. A negative income tax proposes a system where there is an equal starting point for all citizens. At the beginning of the tax year, everybody would be given a fixed, equal amount.

For this example I will set the figure at £20,000. This £20,000 is equivalent to a personal disposable allowance. The worker would then add their personal income to this total. Person A – earns £25,000 – taking their total disposable income to £45,000. Person B is unemployed and earns £0, therefore their total income remains at £20,000. The government then imposes a flat tax on any earnings. In this example, I will set tax at 20%. Person A therefore pays £9,000 tax for the year. Person B pays £0, as they have no earnings leaving their disposable incomes at £36,000 and £20,000 respectively. (These figures are of course demonstrative). Friedman believed this to be a fairer approach to the tax system than the current alternatives.

The issue with progressive income taxation is that it relies too heavily on the rich to fund the state. In the UK, the top 1% of earners paid almost 25% of all income tax in 2009. Any increase in the top band of tax, could lead to a phenomenon known as the “brain drain”, whereby the rich leave the country to avoid heavy taxes. The UK is at risk of such a brain drain, especially considering the rise of the UAE in recent years, where they pay no personal taxes.  Without the implementation of a starting income as described above, a standard regressive flat tax (such as VAT) is disproportionately harsh on those at the bottom end of the income scale, taking more as a real value than it does from higher earners.

A Negative Income Tax would give every UK citizen a solid starting point for the year. It would do away with unemployment benefits and housing benefits, but would keep vital benefits such as Disability Allowances, ensuring that those who are most at risk remain protected by the state. The so called “undeserving poor” (a phrase I am not too keen on) those who remain on benefits despite having the ability to work would have more incentive to work. As they would not have to comprehend a confusing taper rate, which is a vast improvement on the complex system currently employed in the UK.

The idea is backed by some inside of the political sphere. The Tax Payers Alliance has argued that a Negative Income Tax would be cheaper in terms of bureaucracy for the Government, and of course much simpler for tax payers of the UK.

Despite the merits of Negative Income Tax theory, it is worth noting that a Negative Income Tax has never been tried by any country and currently remains an economic and political theory.

And before any clever clogs attacks the theory by saying there aren’t enough jobs out there… This an economic theory and in my opinion it would work better than the current system. Please judge it solely on its merits, not on your party politics.