Forget Negative Income Tax. Basic Income is Better.

They’re both good ideas, but Basic Income comes out clearly on top.

Some people are quite positive toward the idea of having a Basic Income, but take the view that a Negative Income Tax (NIT) system would be better. I don’t think that’s true, but that’s mainly because a Negative Income Tax and Basic Income are a lot more similar than many people appreciate.

In fact, a NIT system and a Basic Income system can be designed to have exactly the same outcome in terms of how much disposable income each individual ends up with.

Suppose, for example, you had a Basic Income set at $10,000 per year and Income Tax set at a flat 25%. The equivalent Negative Income Tax system would work like this:

• You would pay 25% Income Tax on any money you earned over $40,000 per year.
• But if your earnings were below $40,000, you would be paid 25% of that shortfall as a Negative Income Tax.

To see how similar the two systems would be, consider these examples:

Example 1: You earn nothing.

Under the Basic Income system, you would be paid $10,000 in Basic Income. So, your total ‘disposable’ income would be $10,000.

Under the NIT system, your income is $40,000 short of the threshold level. You would be paid 25% of that shortfall as Negative Income Tax. 25% of $40,000 is $10,000. So, your total disposable income would be $10,000. Example 2: You earn $40,000

Under the Basic Income system, you would be paid $10,000 in Basic Income, but you would also pay 25% tax on your earnings. Your Income Tax bill would be $10,000. Your disposable income would be $40,000.

Under the NIT system, your income is exactly at the $40,000 threshold — so you wouldn’t be taxed on your income, but you wouldn’t get any Negative Income Tax either. Your disposable income would be $40,000.

Example 3: You earn $80,000

Under the Basic Income system, you would be paid $10,000 in Basic Income, but you would also pay 25% tax on your earnings. Your income tax bill would be $20,000. Your disposable income would be $70,000.

Under the NIT system, your income is $40,000 more than the threshold amount. This money would be taxed at 25%. Your income tax bill would be $10,000. Your disposable income would be $70,000.

As you can see, in all these examples, you end up with exactly the same amount under both systems. And it’s the same for any other income level. No matter what you earn, your total disposable income is the same under both systems.

But that doesn’t mean that Negative Income Tax and Basic Income are exactly the same. The way they differ is in terms of administration.

For people with regular full-time jobs, NIT seems to make a lot of sense, from an administration perspective. Your income has to be regularly reported to the government anyway, so that your tax liability can be assessed. Consequently, it seems very reasonable that any welfare payments you might be due should be calculated through the same system. And if everyone had a regular, permanent, full-time job, it would be perfectly sensible to have a NIT system.

But things aren’t that simple in the real world, of course. Not everyone has a job. And not everyone that has a job has a steady job. Some people have to juggle several part-time jobs. Some people work on temporary contracts. Some people have ‘flexible’ or ‘zero hours’ contracts. The hours they work can vary very considerably from one week to the next — and their income levels may vary accordingly. Some people are self-employed — and their income levels may also vary very considerably.

And when people work fewer hours, or have to accept a pay cut, or take time off, or become unemployed, or experience a fall in their business income, or any number of other eventualities occur, a NIT system may struggle to keep up with all this information and ensure people get paid the right amount, so they have enough money to live on each week. There could easily be delays that leave people short.

That’s why people nowadays tend to champion a Basic Income system instead. With a Basic Income system, each individual gets the same amount in Basic Income, week in, week out. Your hours and pay may rise or fall, but you still get the same Basic Income every week, without fail — ensuring you’ll always be provided for, no matter how your work circumstances may change.

And with a Basic Income system, it’s also much easier to work out what payments parents should be getting for their children. There would simply be a Basic Income for children — although it would probably be a slightly lower amount than the Basic Income paid to adults. With a NIT system, however, things could be rather more complicated.

So in terms of administrative efficiency and in terms of being able to provide financial and psychological security, Basic Income is significantly superior to a Negative Income Tax system.

Yes, in theory, both systems could be designed to have the exact same financial outcome, but this financial outcome is not the only important outcome at stake. Peace of mind is also important and Basic Income scores significantly more highly on that scale.

What perhaps makes ‘Negative Income Tax’ attractive, in some people’s minds, is its name.

When asked to think about people in receipt of welfare payments, a lot of people don’t think of people with disabilities, or carers looking after the elderly. They don’t think of hard-working people on low incomes or people who find themselves unemployed through no fault of their own. Instead, they instinctively think of work-shy, ‘good-for-nothing’ layabouts, content to live on state ‘handouts,’ who’ve ‘never done an honest day’s work in their lives.’ Consequently, welfare has negative connotations in a lot of people’s minds — even though most welfare recipients aren’t like that at all, of course.

But whilst ‘Negative Income Tax’ is, in essence, a welfare payment, it doesn’t sound like a welfare payment. It sounds like a type of tax — and thus it often manages to avoid the negative associations of other welfare payments that sound more like welfare payments.

In terms of administrative efficiency, a Basic Income system is better than a NIT system — but some people will be instinctively negative about it if it is primarily presented as a welfare payment.

Unlike most welfare payments, however, Basic Income is actually for all citizens. So perhaps it might be better, from a marketing perspective, to promote it not so much as a welfare payment, but as a citizens’ dividend — a modest payment for being a ‘shareholder’ in the gigantic economic and social enterprise that is the nation state in which you live.