Negative Income Tax

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Description

From the Wikipedia:

"In economics, a negative income tax (abbreviated NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented. It was developed by Juliet Rhys-Williams in the 1940s and later by United States economist Milton Friedman in 1962 in Capitalism and Freedom. Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.

In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.

Typically, this is proposed to be implemented as a flat tax combined with a fixed government payment. For example, if the flat tax rate is 25% and a government payment of $10,000, then:

  • A person earning $40,000 per year would be at the break-even point. They pay no taxes, because their tax payment equals their government payment.
  • A person earning $1,000,000 would pay close to the full 25% tax, as the government payment would be negligible compared to the $250,000 in tax payments.
  • A person earning only $4000 per year would pay $1000 in taxes but receive $10,000 in payment, for a net income of $13,000, or $9,000 in net government payments. The net payment is 25% of the difference between their income and the break-even income."

(http://en.wikipedia.org/wiki/Negative_income_tax Wikipedia)