What a Negative Income Tax Could Mean for You

Find out what NIT is and how it would affect you if the U.S. adopts it.

In 1962, economist and author of “Capitalism and Freedom” Milton Friedman proposed the concept of government subsidies for low-income families. Under this type of tax reform and social policy, eligible low-income families would receive negative income tax money from the government instead of welfare checks and other forms of financial assistance. You might qualify as a low-income family and be eligible for this type of assistance if you have trouble paying your bills.

Take a closer look at what a negative income tax is, how it differs from a progressive income tax and what it could mean for you financially if the U.S. adopted it.

How a Progressive Income Tax Works

The U.S. uses a progressive income tax system, which takes a larger percentage of money from high-income earners than from low-income individuals. For example, single filers who earn at least $91,900 but less than $191,650 for the 2017 tax year will be subject to a 28 percent tax rate, and those who earn more than $191,650 but less than $416,700 will be subject to a 33 percent tax rate.

A progressive tax system is supposed to reduce the tax burden for those with the least ability to pay, leaving them with more money in their pockets. Progressive tax systems rely on those with the highest incomes to fund public services like Social Security, Medicare and international security.

Related: IRS Federal Tax Brackets — Frequently Asked Questions

NIT and Tax Reform

A negative income tax system would increase the amount of tax you pay as your income grows, like a progressive system. If your income dropped below a certain level, however, the government would issue you a credit that represents a percentage of your decreased income. For example, if the threshold for positive tax liability for a family of four is $10,000 and your family earned only $8,000 during the year — assuming a negative tax rate of 25 percent — you would receive a $500 check from the government. A family with zero income would receive $2,500.

The U.S. Earned Income Tax Credit is a form of a negative income tax. The EITC is a government benefit available to workers with low to moderate incomes. It reduces the amount of tax you owe based on your income and other qualifying criteria, which means you might get a refund even if you didn’t pay a significant amount in taxes for the year.

NIT Drawbacks

Critics cite many issues regarding the negative income tax. The most basic problem associated with a negative income tax is that it is impossible to implement one that simultaneously:

  • Provides as generous an income as what is currently available to many welfare recipients in the U.S.
  • Provides a work incentive
  • Restricts coverage to any manageable proportion of the population

The government has explored several options for a tax system that promotes the general welfare of income earners at all levels. Although an NIT could help low-income earners manage basic living expenses, it’s not without its drawbacks. For now, however, if you’re a low-income earner, use the Earned Income Tax Credit to get the financial help you need.