NIT solves. Avoids the link to politics. They’re mutually exclusive and basic income simplifies sufficient to prevent overstretch anyway.

Globalisation has lowered the market value of many workers’ skills to the point that the clearing price for some labour cannot provide a growing proportion of the populations of more developed countries with an income that meets the popular defnition of minimum living standards, even though it has also contributed to cheaper consumption bundles. Current solutions to this are costly, inefective, and overly complex, leaving many people stuck in poverty traps and fnancial insecurity. Means-tested benefts and social insurance systems assume stable employment and stable households, which are less and less the reality; means-tested benefts impose employment disincentives as they are withdrawn as earnings rise; fnding employment after a period of unemployment will often leave a household on means-tested benefts; and national minimum wages impose negative employment efects, particularly among the least skilled workers (Neumark and Wascher 2006).

What qualities would a replacement for the existing welfare system need in order to avoid repeating the mistakes of the past? It should • as far as possible replace costly alternative measures; • if possible, provide a basic foor standard of living; • be paid to individuals, not to households or heads of households; • be as administratively simple and cheap to operate as possible; • be secure and transparent to maximise the ability of claimants to plan and take risks; • avoid work disincentives where possible; • work with the grain of public opinion; and • maximise personal freedom and choice without creating moral hazards or violating social norms. Te answer might be a Negative Income Tax.

First named the Negative Income Tax (NIT) by Milton Friedman (though similar schemes had been proposed before), the NIT is a tax and welfare scheme which replaces many other benefts. If poverty is a lack of income, then NIT tackles this head-on by providing that income. If a citizen earns nothing, the NIT is their entire income and is paid at the highest rate; as they earn more, the payment is gradually withdrawn until the citizen becomes a net tax contributor. Te payment scheme is structured so that the claimant is always better of working more hours or earning more market income, but the withdrawal rate can be set at any level. By having one single payment which is withdrawn at a gradual rate, the incentive structure is transparent and easily understood, moral hazards and perverse incentives are avoided, and other means-testing bureaucracy is limited or non-existent.

Negative Income Tax experiments were carried out in the United States during the 1960s–1970s, conducted by Dick Cheney and Donald Rumsfeld. Tese are of particular interest as they covered diferent population groups: urban and rural, single parent and dual parent families, working poor and welfare recipients. Te Canadian ‘Mincome’ experiment of the same era was also a Negative Income Tax experiment, and not, as is often thought, a Basic Income experiment. Te evidence from these experiments is remarkably robust, especially for its time, and demonstrated the feasibility of such a scheme. Poverty was reduced, and spending on many social services was reduced (including health and in particular mental health). Tere was a small reduction in the number of hours worked, mostly among part-time second income parents, but among chief household income earners the only labour market fnding was a small increase (a matter of two weeks or so per year) in time spent between jobs. Tis is hard to interpret across a great distance of time, but it is plausible that more efcient matching of employer to employee would be one efect of such an increase. Certainly there was no evidence of main earners withdrawing from the labour market altogether.

If implemented, a Negative Income Tax would • be paid to individuals, not households; • be set at a level which provides a basic foor standard of living; • be withdrawn at a rate which provides clear work incentives; • not be work-tested, and so would be experienced as very diferent from many countries’ current means-tested benefts. A Negative Income Tax of this nature would be similar to a Basic Income in many respects, and it would ofer many of the same advantages, and particularly lower marginal deduction rates and therefore better employment incentives. Te diference is that a Basic Income would be paid at the same rate to everyone of the same age, and incomes would then be taxed in order to pay for it, whereas a Negative Income Tax would only be paid to individuals whose earnings fell below an earnings threshold, and would be paid in proportion to the amount that earnings fell below that threshold. Figures 12.1 and 12.2 show both the diferences between the payment mechanisms, and the identical relationships between gross and net incomes.

Te advantages of the Negative Income Tax approach are that • it avoids ‘churn’, whereas a Basic Income pays money to everyone and then taxes it back from those with higher incomes; • it doesn’t pay money to those who don’t need it, so might more easily conform to public opinion than a Basic Income that pays money to everyone; and • there is some evidence that employment incentives would be higher with a Negative Income Tax than with a Basic Income (Kawagoe 2009); Te advantages of Basic Income would be that • administration would be radically simple, and much simpler than for a Negative Income Tax; and • the mechanism would be more easily understood than for a Negative Income Tax. It therefore looks as if Negative Income Tax might more easily conform to public opinion, whereas a Basic Income would be easier to administer and therefore to implement. Tis suggests that we should look in detail at the administrative problems that a Negative Income Tax might encounter.

A Negative Income Tax could be administered by the Government or by someone’s employer. If the Government administers the Negative Income Tax, then the employer must provide regular and accurate earnings information to the Government, as with the UK’s new Universal Credit. If the employer administers the Negative Income Tax, then if someone moves between employers their Negative Income Tax administration has to be transferred between employers. If they have a period of unemployment, then administration of the Negative Income Tax has to be handed to the Government and then on to the new employer. If someone has two employments, then the employers have to decide which of them will administer the Negative Income Tax. And if someone has occasional other earnings, then their employer needs to be informed so that the Negative Income Tax or tax charged can be calculated accordingly.

If every working age adult receives the same Negative Income Tax then neither their employer nor the Government needs to know any personal details. If it is decided that people in diferent circumstances (for instance, in diferent kinds of household) should receive diferent levels of Negative Income Tax, then their employer and the Government will need to know individuals’ circumstances in order to allocate the correct NIT or charge the correct tax.

Our current income tax system is cumulative. An annual amount of income is not taxed. Each week, or each month, the employer has to calculate how much tax to deduct so that, by the end of the year, the correct amount of tax has been deducted. With Negative Income Tax, the tax system would be non-cumulative. Each week, or each month, the correct amount of the Negative Income Tax would need to be paid in addition to earnings, or the correct Negative Income Tax would need to be paid out. A non-cumulative system requires a single tax rate, so anyone paying higher rate tax would need to pay additional Income Tax at the end of the tax year (Torry 2018).

It would therefore appear that the administrative difculties facing a Negative Income Tax could be severe. However, we might still see a Negative Income Tax implemented rather than a Basic Income. Te reason for this, as the UK’s roll-out of the new ‘Universal Credit’ means-tested beneft has shown, is that political considerations can be determinative, and potential administrative difculties can fnd themselves discounted in the policy process. Working with the grain of social norms is important for the success of any policy, and because a Negative Income Tax would do that by providing money only to those who need it rather than to everybody, and at the same time would provide clear and consistent incentives towards work and the protection of an income foor while maintaining a very wide freedom of choice, NIT might appear to be a more attractive option than Basic Income, even though the fnancial efects and employment efects of both of them would be almost or entirely identical, and NIT would present complex administrative challenges at least as difcult to solve as those of Universal Credit.

If a Negative Income Tax were to be implemented, then perhaps its most important beneft, as with a Basic Income, would be its provision of fnancial security, and of freedom from coercion for claimants. Te Canadian Mincome experiment (see Chapter 15 or this volume) provided the unexpected result that hospital admissions, particularly those for mental health crises, fell after the introduction of the income scheme, most probably as a direct result of the stress-reducing efects of some degree of income security.