# Thoughts on the Negative Income Tax

## Introduction

Recently I was in a discussion on poverty, helping the poor, subsidizing education, etc. (socialist and liberal ideas/theories) with a co-worker. I, being a very libertarian capitalist, was confronted with the notion of Universal Basic Income (UBI). Immediately I stopped. I'd had this discussion before. My answer was a firm "NO." My co-worker responded with "Well ... what would you propose?"

In all honesty this was something I was quite defeated by. All I could answer with was "I honestly don't know what I should say. I've never really had to give an alternative to this before. I'll do my homework and get back to you on it." With that the discussion concluded, at least between the co-worker and I, and I was off to find an answer.

## The Discovery

As soon as I got home I went on Google and searched up Milton Friedman. I've read a couple of his essays and remembered something about his notions on taxation and the welfare state. I stumbled upon this web article on Friedman's notion of Libertarian Redistributionism.

##### - Guy Sorman, Why Not a Negative Income Tax?

After looking into NIT I actually discovered that it wasn't his creation.

##### - Chris Whiting, Why The Negative Income Tax Is The Future

Regardless of its origin I will be speaking in line with what Friedman had to say about it.

## Clarifying the Formula

Since I know somewhere along the lines of "how can I test this" will be thrown at me here is the simple formula:

# I = M - (M-E)(T)

##### I - Final Income After NIT TheoryM - Amount of Money You MadeE - The Exemption LevelT - Tax Rate

Example Scenario For Conceptualization

Say you make $10,000 a year, the Exemption Level is set at$15,000, and the tax rate is 50% then:

I = 10,000 - (10,000 - 15,000)(0.5) = 10,000 - (-5,000)(0.5) = 10,000 + 2,500 = 12,500

## Solving an Obvious Question

One thing I've found is that much of the formula applies to annual income, but what about those paid weekly, bi-monthly, every month, or some other division if a year? There is an easy solution that hit me and quite literally I jumped out of my seat and shouted "THAT'S THE STUFF!" Yes ... I really did that 🙂

Assume a year to be 365 days or 52 weeks depending on your income.
Divide the Exemption Level by the relevant value.
Adjust the annual formula with the relative values.

Example
Say you're paid every 2 weeks (bi-monthly) and that the Exemption Level is set at $10,000 with a 50% tax rate. Well take 52 divided by 2 (yields 26) and use that to divide the Exemption Level appropriately. In this case$10,000 divided by 26 (yields $384.62 (rounded up)). Thus, say you make$200 in your paycheck that week well we need only apply the formula clarified above with the values found here. In all this would be the result: I = 200 - (200 - 384.62)(0.5) = 292.31. So you'd be given $92.31 for that paycheck and have no taxes ... NOICE! Say that you received$200 every paycheck, well at 52 weeks you'd have $7,600.06 (a supplement of nearly 46.2% overall). ## Conclusion After finding all this I thought I'd summarize it for you (incase you're the kind of person who looks straight for this w/o actually reading my article). Friedman has explicitly stated that the tax rate is capped at 50% (hence why I used it in my example scenarios). Besides that and the formula already given I thought I'd see if I could improve upon it in at least some minute manner. Turns out I could. The place of which you live in drastically impacts the necessary income you need to live as a specific class (poor, middle, etc.). With that said I believe that the Exemption Level should be directly correlated to the standard for the state you live in. More specifically, it should be defined as the minimum requirement to be middle class. Just as an example I'll use my state, CA. In CA (2017) the lower bound of an individual middle class citizen was$27,000 (upper bound of $81,000). So say I make$9,000 a year then the NIT using the $27,000 as the Exemption Level and a 50% tax rate supplements my income by$9,000; a literal doubling of my income for that year. Say I made $81,000, then I'd pay$27,000 in taxes (approximately a 34% tax rate), the literal Exemption Level.

Now the question remains is what should the tax rate be? On a personal note, I don't think someone making the upper bound of the middle income bracket should be taxed anything more than 25%. This notion might differ from person to person, but in all it is a crucial element to deciding the bigger question of the overall tax rate. Comment below your thoughts.

Here are some statistics for you. I went through the link in the next paragraph and amassed all the data. If you recall just a moment ago I said I dont think the upper bound of the middle class should pay more than 25%, well I thought I'd show you the necessary overall tax rate used in intervals of 5 starting at 5% up to 50%. Something astonishing to note was that all states differed in the overall tax rate by less than 0.1% so it's safe to use these rates for the nation (USA) in my opinion. In addition you'll also note that the ratio between the hypothetical middle class upper bound tax rate is 1.5 times smaller than the overall tax rate. As you can see the overall tax rate goes above 50% in-between 30 and 35%, but where exactly? The answer: 33.33%. Thus, even by Friedman's maximum allowance the upper bound of the middle class individual shouldn't be taxed more than 33.33%.

##### 5% - 7.5% overall10% - 15% overall15% - 22.5% overall20% - 30% overall25% - 37.5% overall30% - 45% overall35% - 52.5% overall

For some relevant references here's how you can find out what determines middle income according to PEW Research as of 2017 by household size.