The Negative Income Tax

Unfortunately, the recent trend — embraced by a wide spectrum of advocates (with unimportant modifications) from President Nixon to Milton Friedman on the right to a large number on the left — is to abolish the current welfare system not in the direction of freedom but toward its very opposite. This new trend is the “guaranteed annual income” or “negative income tax,” or President Nixon’s “Family Assistance Plan.” Citing the inefficiencies, inequities, and red tape of the present [p. 168] system, the guaranteed annual income would make the dole easy, “efficient,” and automatic: The income tax authorities will pay money each year to families earning below a certain base income — this automatic dole to be financed, of course, by taxing working families making more than the base amount. Estimated costs of this seemingly neat and simple scheme are supposed to be only a few billion dollars per year.

But there is an extremely important catch: the costs are estimated on the assumption that everyone — the people on the universal dole as well as those financing it — will continue to work to the same extent as before. But this assumption begs the question. For the chief problem is the enormously crippling disincentive effect the guaranteed annual income will have on taxpayer and recipient alike.

The one element that saves the present welfare system from being an utter disaster is precisely the red tape and the stigma involved in going on welfare. The welfare recipient still bears a psychic stigma, even though weakened in recent years, and he still has to face a typically inefficient, impersonal, and tangled bureaucracy. But the guaranteed annual income, precisely by making the dole efficient, easy, and automatic, will remove the major obstacles, the major disincentives, to the “supply function” for welfare, and will lead to a massive flocking to the guaranteed dole. Moreover, everyone will now consider the new dole as an automatic “right” rather than as a privilege or gift, and all stigma will be removed.

Suppose, for example, that $4,000 per year is declared the “poverty line,” and that everyone earning income below that line receives the difference from Uncle Sam automatically as a result of filling out his income tax return. Those making zero income will receive $4,000 from the government, those making $3,000 will get $1,000, and so on. It seems clear that there will be no real reason for anyone making less than $4,000 a year to keep on working. Why should he, when his nonworking neighbor will wind up with the same income as himself? In short, the net income from working will then be zero, and the entire working population below the magic $4,000 line will quit work and flock to its “rightful” dole.

But this is not all; what of the people making either $4,000, or slightly or even moderately above that line? The man making $4,500 a year will soon find that the lazy slob next door who refuses to work will be getting his $4,000 a year from the federal government; his own net income from forty hours a week of hard work will be only $500 a year. So he will quit work and go on the negative-tax dole. The same will undoubtedly hold true for those making $5,000 a year, etc. [p. 169]

The baleful process is not over. As all the people making below $4,000 and even considerably above $4,000 leave work and go on the dole, the total dole payments will skyrocket enormously, and they can only be financed by taxing more heavily the higher income folk who will continue to work. But then their net, after-tax incomes will fall sharply, until many of them will quit work and go on the dole too. Let us contemplate the man making $6,000 a year. He is, at the outset, faced with a net income from working of only $2,000, and if he has to pay, let us say, $500 a year to finance the dole of the nonworkers, his net aftertax income will be only $1,500 a year. If he then has to pay another $1,000 to finance the rapid expansion of others on the dole, his net income will fall to $500 and he will go on the dole. Thus, the logical conclusion of the guaranteed annual income will be a vicious spiral into disaster, heading toward the logical and impossible goal of virtually no one working, and everyone on the dole.

In addition to all this, there are some important extra considerations. In practice, of course, the dole, once set at $4,000, will not remain there; irresistible pressure by welfare clients and other pressure groups will inexorably raise the base level every year, thereby bringing the vicious spiral and economic disaster that much closer. In practice, too, the guaranteed annual income will not, as in the hopes of its conservative advocates, replace the existing patchwork welfare system; it will simply be added on top of the existing programs. This, for example, is precisely what happened to the states’ old-age relief programs. The major talking point of the New Deal’s federal Social Security program was that it would efficiently replace the then existing patchwork old-age relief programs of the states. In practice, of course, it did no such thing, and old-age relief is far higher now than it was in the 1930s. An ever-rising Social Security structure was simply placed on top of existing programs. In practice, finally, President Nixon’s sop to conservatives that able-bodied recipients of the new dole would be forced to work is a patent phony. They would, for one thing, only have to find “suitable” work, and it is the universal experience of state unemployment relief agencies that almost no “suitable” jobs are ever found.45

The various schemes for a guaranteed annual income are no genuine [p. 170] replacement for the universally acknowledged evils of the welfare system; they would only plunge us still more deeply into those evils. The only workable solution is the libertarian one: the abolition of the welfare dole in favor of freedom and voluntary action for all persons, rich and poor alike.

• 45For a brilliant theoretical critique of the guaranteed annual income, negative income tax, and Nixon schemes, see Hazlitt, Man vs. Welfare State, pp 62-100. For a definitive and up-to-date empirical critique of all guaranteed annual income plans and experiments, including President Carter’s welfare reform scheme, see Martin Anderson, Welfare the Political Economy of Welfare Reform in the United States (Stanford, Calif Hoover Institution, 1978).[p. 171]