Under which head of income income can never be negative
Answers
Answer:
Explanation:
What is negative income tax? The negative income tax is a way to provide people below a certain income level with money. In contrast to a standard income tax, where people pay money to the government, people with low incomes would receive money back from the government.
Theoretically, this would work by giving people a percentage of the difference between their income and an income cutoff, or the level at which they start paying income tax. For instance, if the income cutoff was set at $40,000, and the negative income tax percentage was 50 percent, someone who made $20,000 would receive $10,000 from the government. If they made $35,000, they would receive $2,500 from the government. (This is different from a universal basic income in which everyone, regardless of income level, receives the same amount of money.)
This structure is designed so that people who work will always make more than people who don’t, which would ideally incentivize people to work. While someone who makes a little money — but not enough to pay income tax — will receive less from a negative income tax than someone who doesn’t make any money, overall, the person earning more will have more. The goal with a negative income tax is that no one is destitute, and earning even a small salary is always preferable to earning nothing.
The U.S. doesn’t currently have a negative income tax in place. It does, however, have the earned income tax credit, which functions similarly and benefits millions of Americans. That program generally has bipartisan support, and there is even legislation proposed to expand it.
The idea. The idea of a negative income tax began gaining steam with the 1962 publication of economist Milton Friedman’s book “Capitalism and Freedom.” Friedman thought a negative income tax would alleviate poverty — and he believed it would have many additional benefits, as well.
Friedman argued that a negative income tax improved on traditional welfare — he wanted to give poor people cash rather than an array of welfare benefits. People could then use the money as they saw fit. He contended this would simplify the system — since it would be administered centrally by the IRS, who would cut the checks, instead of many different organizations — and be more valuable to intended beneficiaries, thereby increasing our transfer system’s bang for its buck.
According to MIT economics professor Joshua Angrist, Friedman’s reasoning was sound — most economists agree the welfare system is flawed. “From the point of view of consumer welfare, money is always just as good and probably better than in-kind transfers,” he said.
Welfare versus a negative income tax. Today, many branches of the welfare system in the U.S. provide people living below a certain income level with in-kind benefits. These are goods or services people need, like food stamps or housing vouchers, where instead of money recipients can use on anything, they get vouchers that must be used for one thing only.
Economists agree there are problems with this system, such as in-kind benefits taking away people’s autonomy to buy what they think they need most and being generally less effective at lifting people out of poverty.
But perhaps one of the biggest flaws in the system is what happens when welfare recipients start to earn more money. “The irony of our welfare system is that poor people pay very high taxes — for each dollar of earnings they lose benefits,” Angrist said.
That is to say, by working, people on welfare may actually find themselves worse off — particularly if they earn enough to lose benefits but not enough to pay for those things themselves.
For example, suppose someone on welfare earns an extra $1,000, but loses $500 of their benefits as a result. This amounts to a 50 percent marginal tax rate. Some people face marginal tax rates of 80 percent — one study even showed marginal tax rates of more than 100 percent [PDF]. “Rich people with salaries don’t pay a marginal tax rate that high,” Angrist said. “Milton Freidman was one of the first to look at this and say, ‘We ought to scrap the whole system.’”
A negative income tax, as Friedman saw it, would therefore solve two main problems: It would give people cash as opposed to in-kind benefits and have a much lower tax rate. While people would still lose benefits the more they made, with a negative income tax, they would always come out ahead with a higher income.
That was Friedman’s view. According to MIT Sloan senior lecturer Robert Pozen, “whether or not a negative income tax would actually be better than welfare is a complicated question.”