Sat, Nov 25, 2006 - Page 9 News List

Milton Friedman's negative income tax an unrivaled success


Milton Friedman, who died last week at 94, was the patron saint of small-government conservatism. Conservatives who invoke his name in defense of social security privatization and other cutbacks in the social safety net might thus be surprised to learn that he was also the architect of the most successful social welfare program of all time.

Market forces can accomplish wonderful things, he realized, but they cannot ensure a distribution of income that enables all citizens to meet basic economic needs. His proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer -- say, US$6,000 -- to every citizen. A family of four with no market income would thus receive an annual payment from the IRS of US$24,000.

For each dollar the family then earned, this payment would be reduced by some fraction -- perhaps 50 percent. A family of four earning US$12,000 a year, for example, would receive a net supplement of US$18,000 (the initial US$24,000 less the US$6,000 tax on its earnings).


Friedman's proposal was undoubtedly motivated in part by his concern for the welfare of the least fortunate. But he was above all a pragmatist, and he emphasized the superiority of the negative income tax over conventional welfare programs on purely practical grounds. If the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more. He saw no advantage in hiring armies of bureaucrats to dispense food stamps, energy stamps, day care stamps and rent subsidies.

As always, Friedman's policy prescriptions were shaped by his desire to reduce adverse economic incentives, a feature that architects of earlier welfare programs had largely ignored. Those programs, each administered by a separate bureaucracy, typically reduced a family's benefits by some fraction of each increment in earned income. Rates of 50 percent were common, so a family participating in four separate programs might see its total benefits fall by US$2 for each extra dollar it earned. Under the circumstances, no formal training in economics was necessary to see that working didn't pay. In contrast, someone who worked additional hours under Friedman's plan would always take home additional after-tax income.

The negative income tax was never adopted, because of concern that a payment large enough to support an urban family of four might induce many to go on the dole. With a payment of US$6,000 per person, for example, rural communes of 30 would have a pooled annual payment of US$180,000, which they could supplement by growing vegetables and raising animals. Because these groups could live quite comfortably at the taxpayers' expense, there would be an eager audience for accounts of their doings on the nightly news. Political support for such a program would be difficult to sustain.


Instead, the US Congress adopted the earned-income tax credit, essentially the same program except that only people who were employed received benefits. One of the few American welfare programs widely adopted in other countries, the earned-income tax credit has proved far more efficient than conventional programs, just as Friedman predicted. Yet because it covers only those who work, it cannot be the sole weapon in society's antipoverty arsenal.

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