Issue 12 Taxes and Welfare: Siamese Twins feb,17,2013

Continuing with the alternate forms of taxation I give you the Nobel Prize winning Milton Freedman and his Negative Income Tax.

Taxes and Welfare: Siamese Twins

            While my idea of a deduction (from Issue number 6 Taxes and Welfare Make a baby, posted on Feb,11,2013) could work, its inspiration changes the entire income tax structure.  Rather than the usual tax code alterations, Milton Freedman brings the tax code and welfare together in his negative income tax.  It is a tax code that gives the poor money and keeps as much money as possible in the pockets of the tax payer. 

            Unlike my idea, the negative income tax does much more than rid us of most welfare, but all welfare in addition to Medicare, Social Security, unemployment and food stamps.  Sounds radical right?  Well not really, for Milton Freedman was not a Noble Prize winner for nothing.  Here’s how it works, compliments of Jeffrey A. Miron and his article “Rethinking Redistribution” in National Affairs number 6 winter 2011 edition.  The federal government would first set a guaranteed minimum of say $5,000 and a tax rate of say 10%.  Keep in mind for this idea to work everyone must be taxed at the same rate.  From this point the formula is simple: your earned income is multiplied by the tax rate (10%) and then you subtract the guaranteed minimum ($5,000).  If the gross liability (what you pay in taxes) were to go below the guaranteed minimum then you would receive a check in the mail from the federal government equal to the difference.  Ok, it’s slightly more complex for some people, so here are some examples using the $5,000 guaranteed minimum and the 10% tax rate.  If say you have no income what so ever, you will get a $5,000 check from the government.  Let’s try another example.  Say you’re making $100,000 which is then multiplied by the 10% tax rate.  You will owe $10,000 to the government in taxes, but you then minus the $5,000 guaranteed minimum which results in you paying only $5,000 to the government and you keep a total of $95,000.  That’s a nice chunk of change.  In this last example you make $10,000 that year and you now owe $1,000 dollars to the government.  You minus the $1,000 from the $5,000 guaranteed minimum and you are thus going to get a check for $4,000 dollars letting you keep a total of $13,000.  You not only keep the majority of your money, but you eliminate the need for all welfare in the United States.

            There is a problem however.  You probably noticed that if you get no income, you’re going to get the proverbial free lunch.  Freedman thought it would be best to let people spend the money how they will.  He felt that if they got that money they would be forced to be responsible with it for that’s all the money they would be going to get.  As a result, they would have an incentive to get out of poverty to acquire more money and therefore exit the poverty trap.  Unlike Mr. Friedman we are not that trusting.  So what is the solution to make the negative income tax work?  Simple, a voucher that limits what that money can be used for.  Lets limit the money to the essential such as, food, clothing (within a certain price range), and medical.  This could be too limiting though for you still have State and local taxes (lets hope they adjust there tax codes to) so this voucher could be used to pay for that.  We should also include the rent, mortgage payments (we don’t want people losing there homes), and the heating and electric bills (we want people to be warm in winter and cool in summer), so lets include all those as well.  When it’s all said and done, an impoverished person can only pay for the essentials and not the cable TV bill or a magazine subscription.  Of course the voucher would only apply to the people at or below the poverty level.  We don’t want to be telling our middle and higher income earners how to spend their own money.  This idea would provide an incentive to the impoverished to make more money especially if they want that cable TV or the Internet.

            A simple solution to a complex and over burdened system.  I know it will take a lot to convince people to give up on the old school programs like Social Security, Medicare, Medicaid and those 900 plus welfare programs, but think of the benefits.  You still get the money you need to live here in America, you keep most of your income and most of all you, if you use the voucher idea, provide an incentive for those in poverty to earn more.  Heck, any tax could transition to this one, but that’s if you the reader and the rest of America want to put forth the effort.  I hope it is, I’m fairly charitable, but I’d rather I give my charity voluntarily or through a tax system that is clear and acceptable to me and not the current 16,000 plus pages of tax code that provides welfare to the rich, and hurts small business.  These are the same small businesses that create approximately 70% of the new jobs in the United States.  Its time we change the tax code to one that we can all understand and benefit from.       

Hope you all enjoyed the article by yours truely....expect more interesting topics in the future ;)