negative income tax

  • Source - Economist, July 14, 2018: "Repairing the safety net"     

    Social science: two challenges to the future of the mis-named welfare state are increasing dependency ratios and immigration but the latter may be a fix for the former. UBI and NTI are two new ideas that may be adopted.  

    Old Age Dependency

    Past: William Beveridge is the architect of the British welfare statre. His report, released in December of 1942, outlined the British system of benefits for the elderly, disabled and unemployed plus the national health service and a universal allowance for children. Beveridge intended this to be a complement to the free market system, not a replacement for it. Beveridge wanted to combat the "Five Giants" which he identified as disease, idleness, ignorance, squalor and want. Quote: "we must have bread for all before there can be cake for anyone".  

    Present: three types of welfare states. First, the Scandinavian or Social Democratic model featuring high public spending, universal benefits and strong union-led labor protections (hard to hire and fire). A "conservative" model with Germany as the example featuring a strong contributory principle and with benefits based around the family, not the job. Finally, an Anglo-American model where many benefits are tied to behavior and there a fewer universal benefits but more guaranteed minimums. The ongoing tension: when is a benefit a human right and when can it be made conditional on behavior? Do benefits erode the desire to work? Trend in last fifty years: make more benefits conditional on behavior. 

    Future: two challenges - first, the aging of the population in OECD states (see chart). Baby-boomers in Britain will receive benefits spread over their lifetimes 20% greater than the amount they paid in taxes. Next, immigration causes voters to become volatile and angry regarding benefits ("welfare chauvinism"). Immigration may be the solution to rising dependency ratios. Data from Britain and Denmark indicates that since 2002, EU immigrants have paid more in taxes than they received in benefits.

    New ideas: universal basic income (UBI) seeks to replace the welfare state means-tested bureaucracy wit one simple unconditional payment. It is currently being tested in Scotland and the Netherlands. Next is the Negative Income Tax or NTI, first suggested by Milton Friedman. If your income falls below a certain level, the government pays you the difference. A paper published in 2015 by Luke Shaefer of the University of Michigan shows that an NTI is feasible.