'Negative Income Tax' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
A negative income tax is a tax regime that is considered to be extremely progressive. In this system, those individuals who earn less than a minimum specified amount obtain additional income from their government rather than have to pay the government taxes into the system at all.
This type of forward thinking system has been bandied about by various economists over the years and yet never fully realized in a developed economy. In the 1940’s, British politician Juliet Rhys-Williams became among the first to make the political discussion serious. In the 1960’s in the United States, American legendary free market economist Milton Friedman became a major proponent of the idea.
The function of a negative income tax can be two fold. It can institute a minimum income level. It might also be utilized to provide supplemental income to families earning too little to survive. In this capacity, it would serve the function of providing a system with a guaranteed income minimum.
In such a negative income tax regime, those individuals who bring home a particular income amount would not pay any taxes. Others who earn over this threshold would then pay a percentage of the income they earned over that pre-determined level. Those individuals on the margins of society who realized incomes lower than this amount would receive payments to supplement at least a part of their income shortfall. The amount of money by which their income was below that pre-set level would equal in theory the amount of payments they received from the government and its taxing authority.
In 1962, renowned American economist Milton Friedman first seriously put forward the plan for a guaranteed minimum income in the United States. He envisioned a nation where subsidies provided in the form of federal income would be dealt out to families or individuals whose income was lower than a minimum level.
This negative income tax would ensure that potential claimants could simply and easily obtain the money by filling out their annual tax returns instead of having to apply for and receive welfare benefits. The advantage to such a system would be that it eliminated more or less the requirements of having a complicated welfare system bureaucracy.
Despite the income distribution benefits for the poor that a negative income tax system offers, it is not without its substantial share of vocal critics. This main critique stems from the fact that some low income workers would be discouraged from working at all when on this system. The reason is because if the government will provide one with $2,500 per year without working at all when the individual might only earn $5,000 annually in working dozens of hours per week, many consumers would opt instead to not work at all. They would prefer to enjoy the leisure time which they could spend working, even if this means that they ultimately might have a smaller amount of money which was insufficient to cover their essential costs of living.
Another criticism centers on accountability and potential abuse of such a negative income tax system. These critics argue that it is impossible to completely eliminate a large and costly welfare system infrastructure by doling out negative income tax payments. The other taxpayers who are in effect paying for the subsidies will insist on accountability being instituted for those citizens who are receiving what are ultimately subsidies from their income. Such a demand would necessitate a complicated combination of oversight and rules that were necessary to stop possible abuses of the negative income-welfare system.