Tuesday, September 13, 2005

Negative Income Tax

(Hat tip: Mindel G.)
The United States has something to learn from Israel once again. Bibi Netanyahu recently resigned from his post as finance minister of the State of Israel. The immediate impact was a full 5% drop in the stock market within just minutes of his resignation. For comparison's sake, Hurricane Katrina could not affect the United States economy by anywhere near that scale.
Clearly, Netanyahu was doing something right: Notably, turning the old socialist economy into a new, free-market, capitalist haven in which taxes were chopped dramatically and government purses tightened. His plan, while hard for many - especially on the poor end - to stomach at first, did in fact bring about a world of difference for everyone, including the poor.
Now, the Israelis are trying to follow in Netanyahu's shadow and continue and enhance his original plan. One idea that has been thrown around a lot recently is truly excellent and something that should be considered here as well:
The prime minister and the new finance minister, for instance, are promoting the negative income tax. It is a simple idea:

Anyone who works for a low wage - in other words, minimum wage - not only will not pay income tax, which was in any event the case until now, but will receive, directly from the treasury, and maybe even via the regular salary, the opposite of income tax: a sum of money that would actually increase his or her monthly income.
The big catch: You have to actually work to receive the money.
The plan has a dual purpose: to reduce poverty and to encourage employment. The poor will have more money and will be removed from the poverty rolls - but only those who work. Because work, as Netanyahu has constantly said - in a message that we thoroughly internalized - is the tried-and-true means for extrication from the cycle of poverty. Anyone who works cannot be poor.
Imagine if the same deal were struck in America: If you work, we will give you extra money. Find a job that pays $10/hour, and the government not only won't (or barely) tax you because you're in a low bracket, but will actually add money to your wallet. Your $80/day job is all of a sudden worth (let's say) $95. While this still doesn't ensure that people will save or invest, it allows many struggling families or those that are barely saving to do that much more.
Golan in his article argues that this is somehow disasterous for the Israeli poor - but is unclear in why; and takes as a given that the privatization of the social-welfare systems is a negative. He is wrong on both counts: The privatization of the programs has been a tremendous boon to the Israeli economy, as have the tax cuts - much like President Bush's cuts here were. The Israeli economy has been growing at unprecedented rates, even as the intifada has been raging in its backyard. The S-Index (similiar to the DOW or S&P500 here) has grown every month since 2003, the Consumer Price Index has dropped 1.9%, taxes have fallen 6% (while tax revenues only fell 3%), and interest rates were cut from 9% to 4.1%.
While there are many more facts and figures to show how well Netanyahu's plan has been working, the 5% drop in the Tel Aviv market says it the best: Netanyahu was the best thing to happen to the Israeli economy in years. The negative tax idea seems like an excellent way to encourage dramatic growth and bring many low-income workers over the poverty line and onto the path of savings and success. Those who truly are not able to work are not being abandoned - there should be other programs that take care of them - but those are able to work are now being given extra incentive to stay off the welfare rolls. The United States should think about doing something similiar, rather than giving out many of the social favors they already do. While it is wonderful that many (including myself) are better off financially by not working part-time, that is not how things should be.
Pay people to work; not to sit and write about it.

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  1. Just found this post and had to chime in. The US has a "negative income tax" already. It is called the EIC (Earned Income Credit) and one can actually receive their EIC if they file the proper paperwork (the W-5) with their employer.

    The EIC is welfare in disguise, as is the "negative income tax."

    I imagine that you have not started to take the accounting series, but if you have, bring this up with your prof.

    From a fellow accountant.

  2. Admittedly, we don't cover everything in our typical accounting classes. I know a bit about the EIC from relatives who qualified (we almost did... but we didn't).

    I don't know enough about it, but it seemed to me that one had to work a certain amount to earn the credit - therefore, it's on a different level than welfare. I'd much rather have people earning the EIC than welfare or unemployment.

  3. Basically the EIC starts out very low for those that work very little and increases, at the peak, to a rather high amount for those that work basically throughout the year, but who work for fairly minimal rates, and then it slowly decreases and fades out as a wage earner enters a higher salary bracket. The EIC is extremely difficult to qualify for if you do not have kids, as it is designed to benefit those with children.

    I would highly recommend looking at the EIC charts to get an idea of how it works. However, I can tell you that your average young kollel couple with one child(wife works as an administrative assistant, husband only earns small amounts) will fall towards the top of the EIC credit. The money they received back from Uncle Sam (EIC and one other similiar credit), for which they never paid in via wages, was equal to about a month and a half worth of my take home pay after tax.

    The EIC is a welfare program, with a little more "class" than other more traditional programs.