pktechgirlbackup | Negative Income Tax (Reply)

Doh. I can't believe I got this far in anti-poverty measures without trumpeting the negative income tax. The NIT is exactly what it sounds like: above earnings of $N, you pay taxes per normal. Below $N, you receive a bonus proportional to how much you earned. People who earn less receive a larger bonus proportional to their earnings, but the system is calibrated such that you are never punished for earning more. It's similar to the EITC, but more finally tuned, and unlike most forms of public assistance I have no problem with it being given to healthy childless adults, because I think the benefits are worth the relatively small cost. The NIT doesn't have to be exclusive to other forms of aid to the poor, but I think it a perfect world it would be the dominant if not only form. You can also make additional adjustments like making the refund percentage a function of the number of dependents/of.

So here's what this accomplishes:

Yay incentives to work. I can't find it now, but I've written before on how the minimum wage is bad, and if we want people to be paid more for work, we should just do it. I also think this would improve marginal workers treatment at the hands of employers, because if the employer is paying less in cash the worker can extract more in non-financial benefits.
Yay incentives to declare income. For one, this will help with opening a business/getting credit/getting housing/getting transportation. For two, while I more or less view taxes as a necessary evil, tax cheats make my blood boil, in part because I think my taxes are way too high and pay for a bunch of things I don't like and yet I pay them anyway. But it's human nature to not declare the income if you can get away with it, especially when you're living that close to the edge. So if we can fix the system to reward people for the right behavior, that's awesome. Admittedly, it creates a new incentive to cheat by inflating your income, but I think that cost is outweighed by the other benefits.
It destroys the penalty for moving from informal to formal work (up to $N), reducing the likelihood people get stuck in the informal zone.
It gives everyone a piece of ownership in the country. Technically everyone pays income tax because the idea that payroll taxes are earmarked for Social Security/Medicare, but somehow this hasn't translated well. If NIT was combined with PAYGO, you would know that voting for a new program would cost you money, regardless of your income level, and I think that's good.

Disadvantages:

This doesn't handle people can't work. This isn't so much a cost as an acknowledgment that if we want to take care of them, we'll need a different program.
In order to maintain a reasonable marginal tax rate, you either have to set $N very very high, probably higher than I'd be willing to do, or have the extremely low earners suffer from insufficient funds. You could fix this with a separate block grant, but that weakens the incentive to work (although not as much as the current system, so it's still a Pareto improvement).