The UK needs a Negative Income Tax

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The current welfare system isn’t working. The Conservative government has set out to reform the system, most recently by attempting to cut tax credits. Naturally, this caused a huge backlash from the left. Labour party leader Jeremy Corbyn argued the plan will leave many working families worse off. Surprisingly, criticisms of the plan also came from the right. The decision caused a split within the tory party. Conservative MP Heidi Allen, notably stood in parliament and made a strong case against the plans. In addition, right wing newspaper The Sun, called plans to cut tax credits ‘Bonkers’, and the Adam Smith Institute argued that cutting tax credits undermines incentives to work, which is contrary to the governments narrative of making work pay.

The Adam Smith Institute produced a report titled: Free Market Welfare: The case for a Negative Income Taxarguing that, rather than cutting tax credits, the government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax.

The Negative Income Tax isn’t a new idea. The idea was famously put forward by well-renowned economist Milton Friedman, over fifty years ago. However, perhaps now is the best time to consider adopting the plan.

What is it?

The Negative Income Tax (NIT) is a tax system which guarantees a minimum income for all. If someone is earning below a certain level, that person receives a credit from the government, guaranteeing them a minimum income. The great thing about NIT is that it bridges the gap between the left and the right. NIT provides a minimum income to individuals or families – satisfying the left, in a business friendly, free market way – which satisfies the right. Not only does the system lower the tax burden for all, reduce administration costs and balance the budget, it also radically simplifies the overly complex tax code, and bloated welfare bureaucracy.

Here’s an example of how it would work if the tax rate is a flat 25%, and if individuals receive £10,000 credit:

  • A person who earns £0 would pay £0 tax and would receive a £10,000 credit, making a total of £10,000
  • A person on minimum wage, who works 40 hours a week. would earn £13,520 per year. 25% is owed in taxes, so £2,380. They would receive a £10,000 credit, making a total of £21,140.
  • A person who earns £40,000 per year would owe £10,000 tax and would receive a £10,000 credit, making a total of £40,000. At this point they have broke even. Anyone earning above £40,000 would become real taxpayers.
  • A person who earns £100,000 would owe £25,000 tax, receive £10,000 credit, making a total of £85,000.
  • A person who earns £1,000,000 would owe £250,000 tax, receive £10,000 credit, making a total of £760,000.

Note, these figures have just been used as an example and for ease of maths, I am not advocating these numbers to be used.

As we can see, no one would earn less than a certain amount, in this case £10,000 a year, which would go a long way to solving the problem of homelessness and poverty. Rather than having different benefits and different welfare programs for different things, NIT replaces all these with a single payment. As Friedman once said: “Nobody spends somebody else’s money as wisely as he spends his own”, thus individuals have the freedom to determine how the minimum income they receive is spent.

In addition, instead of destroying incentives to work, like a lot of current welfare programs do, NIT always provides an incentive to work and earn more. NIT could also replace the need for a national living wage, and even national minimum wage, which economists have long argued destroys jobs and makes it harder for young people and low skilled workers to get work.