The Dangers of a Negative Income Tax (NIT)

(Note: This article was greatly assisted by Prof. Moffitt’s article explaining some of the issues behind Friedman style NIT.  I have approached this article with minimal mathematics, knowing that my colleagues will present empirical data in due time.  Furthermore, the focus of this article is on the principles behind those models, the concept of values which underlie our arguments.)

The Negative Income Tax (NIT) has long been advocated by the Chicago School of Economics, particularly by Milton Friedman.  It was therefore a surprise to me that my fellow colleagues here have expressed such a keen interest on this issue, and that interest seems to also be present in Hong Kong Society (Here).  Nevertheless, I must insist that I clarify what exactly the NIT is meant to do, and what policy implications it entails, because these implications may not be as acceptable as my colleagues may believe them to be.  A Friedman-type NIT would mean that all other government sponsored programs would have to cease and be replaced solely by NIT, in other words, there will no longer be subsidized healthcare, no subsidized education, no subsidized transportation or utilities.  All public benefits even current lump sum payments to the elderly will be stopped if the NIT is to be truly implemented.  At least this was Friedman’s vision: the NIT was intended to be a simple and cost-efficient welfare system that would just latch onto the tax system that the US had and replace the complex system of welfare benefits in the US.  But that is all it was: it was simply a lesser evil.  Just like any governmental policy, the NIT poses dangers both economically and politically.

Week 1: Negative Income Tax

For our first week, we would like authors and contributors to write about the Negative Income Tax, particularly its viability in Hong Kong and of course the implications it may have.  We would like authors to focus especially on how the tax would play out in Hong Kong, though examples from abroad can also be considered.

In order to assist readers (and perhaps writers also), we will follow a commonplace definition of the NIT: A progressive tax system where individuals earning below a certain amount is entitled to a lump sum payment that is a fraction (at the negative tax rate) of the difference between the limit and level that the individual is earning.

The definition above is intentionally framed to be distinct from a guaranteed minimum income system or other welfare systems.  For more background information, follow this link to the Wikipedia article.