[This essay is from Hazlitt’s book Man vs. The Welfare State (New Rochelle, NY: Arlington House, 1969, pp 84–100; available in PDF). It is an early critique of a proposal made by Milton Friedman that later came to be proposed by Richard Nixon and a version enshrined into law as the Earned Income Tax Credit, which is now the largest cash transfer program for low-income people. See Friedman’s Mistake.]
Recognizing the calamitous erosion of incentives that would be brought about by a straight guaranteed-income plan, some reformers have advocated what they call a “negative income tax.” This proposal was put forward by the prominent economist, Professor Milton Friedman, of the University of Chicago, in his book Capitalism and Freedom, which appeared in 1962. The system he proposed would be administered along with the current income tax system.
Suppose that the poverty-line income were set at $3,000 per “consumer unit” (families or individuals), and suppose that the negative income tax (which is really a subsidy), were a flat rate of 50%. Then every “consumer unit” (this is the statisticians’ technical term) whose income fell below $3,000 would be paid a subsidy of, say, 50% of the difference. If its earned income were $2,000, for example, it would receive $500; if its earned income were $1,000 it would receive $1,000; if its earned income were zero it would receive $1,500.
Professor Friedman freely concedes that his proposal, “like any other measure to relieve poverty … reduces the incentives of those helped to help themselves.” But he argues that “it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure.”
It is true that a “negative income tax” (which is a misleading name for a tapered-off guaranteed income) would not have quite as destructive an effect on incentives as would a straight guaranteed income. In fact, some thirty years ago I put forward a similar proposal myself. This appeared in an article in The Annalist (a weekly then published by the New York Times) of January 4, 1939. I suggested what I called a “tapering subsidy,” a relief payment that would be reduced by only $1 for every $2 the relief recipient earned by himself.
But I abandoned the proposal when I realized that it leads straight into a dilemma, which is precisely the dilemma of the negative income tax: either it is altogether inadequate at the lower end of the scale of self-earnings, or it is unjustifiably excessive at the higher end. Either it must pay only half an adequate income (by its own definition of “adequate”) to a family that earns no income, or it must pay nearly twice an adequate income to a family that already earns an almost adequate income.
Trick names of this sort corrupt the language and confuse thought. It would hardly clarify matters to call a handout a “negative deprivation” or having your pocket picked “receiving a negative gift.”
The problem that the NIT (negative income tax) evades or glosses over is the problem of the individual or family with zero income. If an individual were given only $300 (the figure suggested in Professor Friedman’s original proposal in 1962), nobody would regard this as nearly adequate — particularly if, as Professor Friedman also proposed, NIT were made a complete substitute for all other forms of relief and welfare. If the NIT payment for a family of zero income is set at $1,700, no advocate of the guaranteed income would regard it as adequate to live on in “decency and dignity.” So if the NIT were ever adopted, the political pressure would be irresistible to make it provide the minimum “poverty-line” income of $3,400 even to families with zero earned income.
The basic subsidy would therefore be as great as under the straight guaranteed income. But if the basic subsidy under NIT to a family with zero income were $3,400, then under the NIT 50% “incentive” formula that family would continue to get some government subsidy until its annual income reached $6,800. But this is higher than the median family income for the whole country in 1963 ($6,637). In brief, this would be fantastically expensive.
In addition, it would raise serious problems of equity. When the subsidized family was earning $6,798 income it would still be getting a $1 subsidy. When it earned $6,802 would it fall off the gravy train entirely, and have to wait until its income fell below $3,400 before it could get on again? And what about the family that had been earning $3,402 all along, and had never got on the gravy train?
The arithmetical dilemma of the NIT has received so little attention from its advocates that I hope I may be forgiven another illustration to show the paradoxical way in which it would work out.
An orthodox relief program would pay the jobless head of a family, say, $60 a week. If he then started to earn something, he would be paid simply the difference between that amount and $60. Under the NIT principle a man who was earning nothing would also receive a relief payment of $60 a week. But if he then earned $30 a week on his own he would still get a $45 payment (reduced by only $1 for every $2 earnings), bringing his total income to $75 a week. If he was later able to earn the full $60 for himself he would still be getting a relief payment of $30 a week, bringing his total income to $90. In fact, even if he succeeded in bringing his total self-earnings to $118 a week he would still be getting $1 a week in relief payment.
He would then be almost twice as well off economically as he would if he had always earned enough — say, $61 a week — not to get on the relief rolls in the first place. This would be clearly inequitable to those who had never got on relief. The incentive to get on relief, and certainly to stay on relief, would be enormously greater under NIT than under the present system.
If we tried to escape this result by using the NIT formula only in part — taking the man off relief, say, as soon as he was himself earning $60 a week — we would get an even more absurd result. When he was earning $58 a week under NIT, he would still be getting $31 a week from the government, making his total income $89. But if he then made the mistake of earning only $2 more he would end up with a net loss of $29 a week. So the negative income tax would create a tremendous positive incentive to get and stay on relief permanently.
The NIT scheme could avoid this preposterous result by paying a man with zero income only, say, $30 a week, or only half as much as its own proponents assume that he needs to live on.
Some readers may think that the dilemma of the NIT scheme can somehow be escaped by changing the percentage by which the relief payment or income supplement is reduced as self-earnings increase. But any change from 50% one way or the other merely reduces one horn of the dilemma by making the other more formidable. If we reduce the government supplement by 75 cents for every dollar of self-earnings, we correspondingly reduce or destroy the incentive for such self-earnings. If we reduce the government supplement by only 25 cents for every dollar of self-earnings, we increase the recipient’s incentive to work and earn, but at the cost of a still more expensive program for the government, and we increase the recipient’s positive incentive to stay on relief because of the violent drop in his income if he ever got off.
If we make the scheme more complicated by, say, reducing the relief payment or supplementary income by only 25 cents for every dollar of the recipient’s first $10 of weekly self-earnings, 50 cents for every dollar of his second $10 of self-earnings, and 75 cents for every dollar of his third $10 of self-earnings, or some similar scheme, we merely pile up an administrative nightmare without solving the basic dilemma. The unpalatable truth seems to be that whenever we try to “increase incentives” by reducing a relief payment by less than a dollar for every additional dollar of self-earnings, we solve an immediate problem at the cost of building up a bigger problem for the future.
In addition to the special dilemma it presents, the NIT retains the fatal defects of the straight guaranteed income. By neglecting the careful applicant-by-applicant investigation of needs and resources made by the ordinary relief system, it would open the government to massive fraud, chiseling, and swindling. And it would also, like the guaranteed income, force the taxpayers to support a man regardless of whether or not he was making any sincere effort to support himself. The government is bound to get into insoluble difficulties if it starts to give money away to “the poor” not only without making sure that they are poor but without bothering to find out the reasons why any particular individual or family is poor.
How Much Would It Cost?
How much would a guaranteed-income or NIT program cost? I have already pointed out that proponents have put out calculations as high as $38 billion a year, but we may be confident that their cost figures are systematically underestimated, even for the early years. And if once the main principle of either proposal were accepted, the minimum subsidy or guarantee demanded would be bound constantly to increase. Anyone who doubts this need merely consult the history of unemployment insurance and Social Security benefits since those plans were initiated in the 1930s. (They too were going to replace straight relief, which, however, continues to grow at an alarming pace.)
Is there any assurance that a guaranteed-income or NIT plan would not also grow as rapidly? Present indications are that it might grow even faster. It is significant, as I have pointed out previously, that when Professor Milton Friedman first proposed his NIT plan in 1962, in his Capitalism and Freedom, he was suggesting that an individual with zero income receive a subsidy of the modest amount of $300. Now he is talking mainly in terms of a family of four and suggests that such a family, with no other income, should receive a basic amount from the government of $1,500. But already there is a prominent competitive scheme (published by the Brookings Institution, and written by Dr. James Tobin of Yale, Dr. Joseph A. Pechman, the Brookings Institution’s director of economic studies, and Dr. Peter M. Mieszkowski) that offers much more generous subsidies. Once the scheme gets into practical politics, we can expect the competitive bidding to get going in earnest.
So knowing what we do of political pressures, and of the past history of relief, “social insurance,” and other “antipoverty” measures, we are forced to conclude that once the principle of either the NIT or the straight guaranteed income were accepted, it would be made an addition to and not a substitute for the present conglomeration of relief and “antipoverty” programs. And even alone it would drastically reduce the productive incentives of those earning less than the guaranteed amount and seriously reduce the incentives of those earning more, because of the oppressive taxation it would necessarily involve. Its overall effect would be to level real incomes down, not up.
Let us take a closer look at the problem of raising taxation still further to pay for a guaranteed-income or NIT program. It is obvious that we could not expect such a program to be paid for merely by the very rich. If we were to subsidize all family incomes below $3,400 (let alone $6,800), it would hardly be consistent to tax them. Yet even before the income tax increase of 1968, single persons with net incomes (after exemptions and deductions) of $500 paid 14% on such income, 15% on the next $500, and so on, so that persons with net incomes below $6,000 were taxed at rates up to 22%.
In 1965, moreover, taxpayers with adjusted gross incomes under $15,000 (who received more than three-quarters of the total personal income there was to be taxed) paid 61.5% of the entire personal income tax. Taxpayers with adjusted gross incomes under $20,000 paid 70% of the entire personal income tax.
Why not collect the major part of the income tax, someone may ask, from the really big incomes? Because taxpayers with adjusted gross incomes above $50,000 received even before taxes only 5% of the nation’s adjusted gross incomes.
So when advocates of the guaranteed income and similar schemes insist self-righteously that “we can afford” to pay for more and more of such schemes, they ought to specify just who “we” are. They ought to explain to people who are earning their incomes the hard way why they really don’t need all that they bother to earn for their own families, and tell them also just how much more they can “afford” to have taken away from them.
Neither a “negative income tax” nor a guaranteed-income plan of the dimensions now being suggested could possibly be put into effect with dollars of present purchasing power.
The Poor Laws of England
Even at present our large and overlapping assortment of relief and antipoverty measures is seriously reducing incentives to the production that would otherwise be possible. Our social reformers have been everywhere overlooking the two-sided nature of the problem of reducing poverty. The obstinate two-sided problem we face is this: how can we mitigate the penalties of misfortune and failure without undermining the incentives to effort and success?
Our social reformers — who sometimes talk as if no government ever did anything to relieve the plight of the jobless and the poor until the New Deal came along in 1933 — are constantly deploring the alleged indifference, callousness, or niggardliness of our forefathers in dealing with the poor. But wholly apart from private charity, previous generations in their governmental capacity were sharply aware of the problem of poverty and made some effort to alleviate it almost as far back as the records go. There were “poor laws” in England even before the days of Queen Elizabeth. A statute of 1536 provided for the collection of voluntary funds for the relief of those unable to work. Eleven years later the city of London decided that these voluntary collections were insufficient, and imposed a compulsory tax to support the poor. In 1572 a compulsory tax for this purpose was imposed on a national scale.
But the problem soon proved a very serious one for the people of that age. The upper class was very small numerically and proportionately. The middle class itself was always very close to what we would call the poverty line. The workhouse and other conditions imposed on those on relief seem very cruel to us today. But our ancestors were in constant fear that if they increased relief or relaxed the stern conditions for it they would pauperize increasing numbers of the population and create an insoluble problem.
At the beginning of the nineteenth century, indeed, the cost of poor relief began to get out of hand. The total cost of the poor law administration increased fourfold in the thirty-two years between 1785 and 1817, and reached a sixth of the total public expenditure. One Buckinghamshire village reported in 1832 that its expenditure on poor relief was eight times what it had been in 1795, and more than the rental of the whole parish had been in that year.
In face of statistics of this kind, the Whig government decided to intervene. It appointed a royal commission, and in 1834 a new and more severe poor law was passed in accordance with the commission’s recommendations.
The guiding principle of the new law was that poor relief should be granted to able-bodied poor and their dependents only in well-regulated workhouses under conditions inferior to those of the humblest laborers outside. This seemed harsh, but the commissioners had argued that “every penny bestowed that tends to render the condition of the pauper more eligible than that of the independent laborer is a bounty on indolence and vice.”
If the pendulum swung too far in the direction of severity and niggardliness in the middle nineteenth century, it may be swinging too far in the direction of laxity and prodigality today. A sweeping subsidization of idleness, such as is proposed by the guaranteed income, would only weaken or destroy all incentive to effort, not only on the part of those who were subsidized and supported, but on the part of those who would be forced to support them out of their own earnings. There could be no faster way to impoverish the nation.
Clearly the great problem today is how to keep relief from getting out of hand. But how can we withhold relief from those who would merely rest idly back on it as a permanent way of life, and yet extend it to those who would use it to get back on their feet and once more become productive citizens? This is the baffling problem that I cannot hope to deal with here in detail. Our cities may find themselves compelled to return to some of the safeguards of former days that they perhaps too lightly abandoned — careful tests of needs and means and resources; aid in kind rather than in cash to make sure that the relief meets the particular needs it was intended to meet, particularly of children; a restoration of a residential requirement, to prevent people from moving to a city just to get immediately on its relief roll and to get more than in some other city; an obligation to do some sort of useful work in return for relief until a suitable private job can be found.
But there is a further way to hold down the relief rolls, and outstanding liberals of former days did not hesitate to recommend it. In 1914, A.V. Dicey, the eminent British jurist, asked whether it is wise to allow recipients of poor relief to retain the right to join in the election of a member of Parliament. And John Stuart Mill, writing in his Representative Government in 1861, did not equivocate:
I regard it as required by first principles that the receipt of parish relief should be a preemptory disqualification for the franchise. He who cannot by his labor suffice for his own support has no claim to the privilege of helping himself to the money of others. By becoming dependent on the remaining members of the community for actual subsistence, he abdicates his claim to equal rights with them in other respects.
In fact, Mill went much further, and insisted that no one should have the right to vote unless he paid direct taxes:
It is also important that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people’s money, have every motive to be lavish and none to economize. It amounts to allowing them to put their hands into other people’s pockets for any purpose which they think fit to call a public one.
In the political climate of today, anyone proposing that the right of franchise be suspended even for those on relief and merely for the time they remained on relief would be derided as having lost touch with political realities. Yet as long as the great and growing army now on various forms of relief and welfare programs retain the right to vote for those who promise them still more of other people’s money, we may expect to see relief and welfare programs grow to the point where they eventually undermine the currency and bring on national bankruptcy. The reader will not find it difficult to think of countries where this has already happened.
The Cure Is Production
One of the worst features of all the plans for sharing the wealth and equalizing or guaranteeing incomes is that they lose sight of the conditions and institutions that are necessary to create wealth and income in the first place. They take for granted the existing size of the economic pie; and in their impatient effort to see that it is sliced more equally they overlook the forces that have not only created the pie in the first place but have been baking a larger one year by year. Economic progress and justice do not consist in superbly equalized destitution, but in the constant creation of more and more goods and services, of more and more wealth and income to be shared.
The only real cure for poverty is production.
The way to maximize production is to maximize the incentives to production. And the way to do that, as the modern world has discovered, is through the system known as capitalism — the system of private property, free markets, and free enterprise. This system maximizes production because it allows a man freedom in the choice of his occupation, freedom in his choice of those with whom he associates and cooperates, and, above all, freedom to earn and to keep the fruits of his labor. In the capitalist system each of us, with whatever exceptions, tends in the long run to get what he creates or helps to create. When each of us recognizes that his reward depends on his own efforts and output, and tends to be proportionate to his output, then each has the maximum incentive to increase his effort and output.
Fight Poverty With Capitalism
Capitalism brought the Industrial Revolution, and the enormous increase in productivity that this has made possible. Capitalism has enormously raised the economic level of the masses. It has wiped out whole areas of poverty, and continues to wipe out more. The so-called “pockets of poverty” constantly get smaller and fewer.
The condition of poverty, moreover, is relative rather than absolute. What we call poverty in the would be regarded as affluence in most parts of Africa, Asia, or Latin America. If an income sufficient to enable a man “to live with dignity” ought to be “guaranteed” as a matter of “absolute right,” why don’t the advocates of a guaranteed income insist that this right be enforced first of all in the poor countries, such as India and China, where the need is most widespread and glaring? The reason is simply that even the better-off groups in these nations have not produced enough wealth and income to be expropriated and distributed to others.
One of the guaranteed-income advocates, in a footnote, admits naively: “We must also recognize that we still have no strategy for the elimination of poverty in the underdeveloped countries.” Of course they haven’t. The “strategy” would be the introduction of free enterprise, and of incentives to work, to save, to accumulate capital, better tools and equipment, and to produce.
But would-be income guarantors ignore or despise the capitalistic system that makes their dreams dreamable and gives their redistribute-the-income proposals whatever plausibility they have. The capitalist system has made this country the most productive and richest in the world. It has continued to achieve its miracles even in the present generation, and to increase them year by year. It has raised the average weekly factory wage from less than $17 in 1933 to $130 in 1969. Even after the rise in prices is allowed for, it has nearly tripled our real per capita disposable income — from $893 in 1933 to $2,473 in 1968 (in 1968 prices).
Allowed to continue to operate with even the relative freedom that it has enjoyed in recent years, the capitalist system will continue to produce these miracles. It will continue to make progress against poverty by a general increase in income and wealth. But shortsighted and impatient efforts to wipe out poverty by severing the connection between effort and reward can only lead to the growth of a totalitarian state, and destroy the economic progress that this country has so dearly bought.
Postscript
In his television talk of August 8, 1969, President Nixon announced a giant step deeper into the quagmire of the Welfare State. What he proposed was the form of the guaranteed annual income known as the negative income tax, plus a couple of additional gimmicks. He put forward this radical proposal in the language of conservatism. He said that the last third of a century had “produced a bureaucratic monstrosity” and “left us a legacy of entrenched programs.” Then he proposed a plan that can only make the bureaucratic monstrosity more monstrous and create still bigger and more entrenched programs.
He talked about a welfare quagmire with increasing caseloads and escalating costs. He expressed his alarm that “in the past eight years, three million more people have been added to the welfare rolls.” And then he proposed a program that would cost no less than $4 billion in the first year alone, and would more than double the number of people eligible for public assistance — from a little under 10 million to more than 22 million.
What additional taxes would be necessary to pay this extra $4 billion was not stated. The president contented himself with the casual remark that the costs would not begin until the fiscal year 1971, “when I expect the funds to be available within the budget.” So nobody need worry, even though Congress is now proposing tax reductions for that and later years.
Notwithstanding the tremendous differences in prevailing incomes, wage levels, and living-cost levels between city and country districts, or between New York and Mississippi, a family of four with no outside income, no matter what state it lives in, would receive under the new plan a minimum federal payment of $1,600 a year. The states could supplement that amount. The same family could earn as much as $60 a month, or $720 a year, with no loss of benefits. Beyond that, aid would be reduced 50 cents for each dollar earned until the family’s income reached $3,920.
There would be no “demeaning investigations.” Applicants would simply make declarations of need and begin receiving payments.
The great safeguard, which is supposed to keep the nation from going into bankruptcy, is that the plan is to encourage — even force — people to work. Every recipient deemed employable would have to accept a job deemed suitable by the government or would have to undergo training.
The long-term outlook for this program is about as follows:
It is likely to be enacted more or less in the form President Nixon has proposed, though perhaps a little bigger. The Republicans in Congress will vote for it as a matter of party regularity. The chief efforts of the Democrats, who represent the party of ever-bigger welfare handouts, will be devoted to trying to increase the benefits and decrease the safeguards.
No sooner will the program have been enacted than efforts will be made to enlarge it. We need merely look at the history of unemployment insurance and of Social Security, both of which were launched in the Thirties. Both were originally enacted on the same argument as the new guaranteed-income proposal: they would make direct relief unnecessary and so displace it. But not only has direct relief multiplied steadily, despite growing prosperity, but unemployment insurance benefits have constantly grown bigger and longer, and Social Security benefits have been increased every one or two years (especially election years) and the coverage constantly widened.
So every year or two guaranteed income will grow. First of all, it will be argued that a family of four cannot be expected to live in decency and dignity on a mere $1,600 a year. This is less than half of the present quasi-official poverty-line income. So the basic subsidy will gradually be pushed up to $3,200 or $3,500 a year, which means that the top combination of earned income and government benefit will move from $3,920 a year to $7,720 or more.
Next, few people on relief will be declared to be employable. Those who are will find very few jobs that they deem “suitable.” They may consent to take government-financed “training” programs, particularly if they are paid $30 a month for consenting, but many of them will merely go through the motions. In any case, the government-administered programs will fall far short of the kind of training in necessary skills provided by the old-fashioned apprentice system in private industry. Most certain of all, the whole program of trying to force people to work for their benefit payments will be denounced as a sort of slavery. The work requirement will soon be quietly shelved.
The burden of taxation will steadily be increased to pay for the rising benefits. The attempt will be made to place the increased burden mainly on corporations and the high individual incomes. This will further erode incentives and discourage the production upon which the welfare of all of us depends. Government expenditures will continue to increase faster than the new tax revenues, bringing a return to chronic deficits, monetary inflation, and a further fall in the purchasing power of people’s insurance policies, pensions, and savings deposits.
It was not altogether auspicious that President Nixon’s announcement of his new guaranteed-income proposal was made on the evening of the same day that was forced to announce another devaluation of the franc. Like policies, like results.
