What a Negative Income Tax Could Mean for You
In 1962, economist and author of “Capitalism and Freedom” Milton Friedman proposed the concept of government subsidies for low-income families. Under this type of tax reform and social policy, eligible low-income families would receive negative income tax money from the government instead of welfare checks and other forms of financial assistance. You might qualify as a low-income family and be eligible for this type of assistance if you have trouble paying your bills.
Take a closer look at what a negative income tax is, how it differs from a progressive income tax and what it could mean for you financially if the U.S. adopted it.
Find Out: Everything You Need To Know About Taxes
How a Progressive Income Tax Works
The U.S. uses a progressive income tax system, which takes a larger percentage of money from high-income earners than from low-income individuals. For example, single filers who earn at least $86,376 but less than $164,926 for the 2021 tax year will be subject to a 24% tax rate, and those who earn more than $164,925 but less than $209,426 will be subject to a 32% tax rate.
A progressive tax system is supposed to reduce the tax burden for those with the least ability to pay, leaving them with more money in their pockets. Progressive tax systems rely on those with the highest incomes to fund public services like Social Security, Medicare and international security.
Related: IRS Federal Tax Brackets — Frequently Asked Questions
NIT and Tax Reform
A negative income tax system would increase the amount of tax you pay as your income grows, like a progressive system. If your income dropped below a certain level, however, the government would issue you a credit that represents a percentage of your decreased income. For example, if the threshold for positive tax liability for a family of four is $10,000 and your family earned only $8,000 during the year — assuming a negative tax rate of 25% — you would receive a $500 check from the government. A family with zero income would receive $2,500.
The U.S. Earned Income Tax Credit is a form of a negative income tax. The EITC is a government benefit available to workers with low to moderate incomes. It reduces the amount of tax you owe based on your income and other qualifying criteria, which means you might get a refund even if you didn’t pay a significant amount in taxes for the year.
Whoa: Jaw-Dropping Stats About the State of Retirement in America
NIT Drawbacks
Critics cite many issues regarding the negative income tax. The most basic problem associated with a negative income tax is that it is impossible to implement one that simultaneously:
Provides as generous an income as what is currently available to many welfare recipients in the U.S.
Provides a work incentive
Restricts coverage to any manageable proportion of the population
The government has explored several options for a tax system that promotes the general welfare of income earners at all levels. Although an NIT could help low-income earners manage basic living expenses, it’s not without its drawbacks. For now, however, if you’re a low-income earner, use the earned income tax credit to get the financial help you need.
More From GOBankingRates
Daria Uhlig contributed to the reporting for this article.
Last updated: Feb. 23, 2021
This article originally appeared on GOBankingRates.com: What a Negative Income Tax Could Mean for You
