As a society, America upholds both the ideal of maximizing individual liberty and the ideal of protecting our most vulnerable citizens. We believe that every citizen should have the right to do whatever he or she wants, provided that he or she does not infringe on the rights of others. We also believe that no citizen should be abandoned to the squalor of abject poverty, hunger, and homelessness.
Unfortunately, these two ideals do not always coexist peacefully, especially when it comes to taxation policy and social welfare programs. Higher income earners in the United States, quite understandably, do not like having to pay higher taxes than lower income earners, especially as the large chunk of their tax dollars go to social welfare programs that benefit only the lower income earners. Lower income earners, by contrast, object to clear benefits the higher income earners receive when it comes to taxes, including having capital gains taxed at a lower rate than regular income and easier access to the multitude of loopholes within the Swiss cheese that is our tax code.
Over the past century, the federal government has created a multitude of programs to help the economically disadvantaged in America. Social Security came during Franklin Roosevelt's New Deal. Medicare, Medicaid, and the Food Stamp program emerged from Lyndon Johnson's Great Society. The Children's Health Insurance Program was created during the Clinton administration. Taken all together, few can deny that these and other such programs have benefited low income Americans tremendously by keeping the specter of abject poverty at bay.
But the price paid has been high. Most obvious is the fact that these programs are horribly expensive. Indeed, paying for them now accounts for more than half of the annual federal budget, and the expected growth of the programs is the most disturbing facet of the fiscal crisis now facing our nation. The blunt truth is that unless we begin reducing the cost of these programs, or adopt an entirely new model of social welfare altogether, the fiscal structure of the United States is doomed to collapse.
Beyond the basic cost, there is another, more disquieting objection raised by innumerable conservatives and libertarians over the years: that massive federal social welfare programs create a culture of dependence among lower income Americans which makes it difficult or impossible for them to break out of the "welfare trap". Perversely, it may be that those very social welfare programs which were created in a well-meaning effort to improve the lives of low income Americans have instead enmeshed them in a cycle of dependence on the federal government by robbing them of any incentive towards material self-improvement. After all, if getting a job with a higher salary, or getting a job at all if one is unemployed, results in losing government benefits of a greater value than the salary increase, what rational person would choose the higher salary or new job? In terms of self-interest and cost-benefit analysis, it would simply make no sense.
Is there a way to create a fair system of taxation and social welfare that ensures a sufficient level of funding for the government and avoids pushing lower income citizens into the welfare trap? One intriguing possibility is usually called the negative flat income tax. In the form suggested by the late Milton Friedman, one of the most influential economists of the 20th Century, the negative income tax would take the form of a completely flat income tax combined with a basic cash subsidy distributed equally to every citizen. In other words, every single citizen would pay the same percentage of his income in taxes, while receiving a subsidy of an equal dollar amount as everyone else, whether he were a wealthy corporate CEO or a guy on the street with a cardboard sign.
As an example, consider a negative income tax with a tax rate of 20% on all income and a subsidy of $6,000. A citizen with absolutely no income would obviously pay no taxes and would receive the $6,000 subsidy. A citizen making a mere $10,000 would end up taking in $14,000 annually ($10,000 minus $2,000 in taxes plus the $6,000 subsidy). A citizen making $100,000 would end up taking in $86,000 annually ($100,000 minus $20,000 in taxes plus the $6,000 subsidy). A citizen making $1,000,000 would end up bringing in $806,000 ($1,000,000 minus $200,000 in taxes plus the $6,000 subsidy). And so on.
Friedman only thought that his plan would work only if it were combined with an even more radical proposal: the cash subsidy received by each citizen should completely replace every other form of social welfare for the economically disadvantaged. If the negative income tax were adopted, Social Security would have to be abolished, as would Medicare, Medicaid, food stamps, and all other programs of social welfare. Minimum wage laws would also have to be repealed.
Under this proposal , the government would essentially wash its hands of taking care of economically disadvantaged citizens, who would then have to provide for themselves using their basic subsidy and whatever their own labor could earn. If a low income person chooses to spend his $6,000 on basic household necessities while working to improve his own economic situation, all well and good. But if they wanted to spend their $6,000 subsidy on alcohol, they'd better hope that their families, churches, and charitable organizations will step in to help them, because the government will not.
It should be pointed out that government assistance to such people as wounded veterans, physically and mentally handicapped people, and people in certain other categories would not need to be affected by the proposal. The social welfare programs which would be replaced by the basic subsidy would only be those directly involved in assisting the economically disadvantaged. It also would not affect such governmental actions as environmental regulation, workplace safety standards, and other such matters.
To Friedman's desire that the negative income tax replace all other forms of government social welfare, I would add a stipulation that the flat nature of the income tax be absolutely binding. The proposal would only work if there were no longer any write-offs, loopholes, or deductions of any kind. Every citizen would have to pay the agreed upon percentage of their total income. One's tax form would be a single page, on which one reported how much money they made over the course of the year, how much money they consequently owe the government (which could be calculated with a few pencil scratches on the back of an envelope), and their check.
Adopting a negative income tax would allow for a massive reduction in the administrative overhead of the federal government. The bloated bureaucracies within the Internal Revenue Service and the vast social welfare agencies would either be massively downsized or abolished altogether. Needless to say, this tremendous reduction in the size of the federal government would greatly ease the budget pressures our country is currently enduring, and remove the burden of an unnecessarily big government from the backs of the American people.
Although the negative flat income tax has been widely discussed since the 1960s, its implementation has always proven politically impossible. Conservatives dislike the notion of giving a cash subsidy to all citizens, while liberals believe that individual citizens cannot be trusted to provide for themselves with the subsidy alone. Politicians of all stripes recoil from the radical nature of the proposal, being instinctively fearful of change and recognizing that the resultant massive downsizing of the government would greatly weaken their own power and influence.
But radical though it might be, the negative flat income tax proposal is no more radical than many of the proposals of the Progressive Era, the New Deal, and the Great Society were in their days. It is an idea on which rational and pragmatic conservatives and liberals can agree. It has the potential to completely revolutionize the relationship between the federal government and the American people, remaking it into a much healthier and more beneficial relationship that is has been over the course of the past century.
It's high time that the negative flat income tax be dusted off and placed before the American people as a serious alternative to the current system of taxation and social welfare.