Negative Income Tax

As you can see from Table 1 above, individuals who are single have to earn less than married couples do to qualify. However, as both groups have more children, the amount needed to qualify for the Earned Income Tax Credit increases. This accounts for increased expenses that people will incur if they have children.

Negative Income Tax Pros and Cons

What are the pros and cons of a negative income tax? Generally, there is a main "pro" and "con" to any welfare program that is implemented. The main "pro" is that a welfare program assists those in need who cannot sustain themselves on their current income; people are not left to "figure it out" if they need help financially. The main "con" is that welfare programs may disincentivize people to work; why work to earn more if you can remain unemployed and receive benefits from the government? Both of these phenomena are present with the negative income tax. Let's go into further detail to see how and why.

The "pro" of a welfare program is present in the negative income tax. Recall that a negative income tax, as opposed to the traditional income tax, aims to give direct money transfers to those who make under a certain amount in yearly income. In this way, the negative income tax is helping those in need of financial assistance — the main pro of any welfare program. The "con" of a welfare program is also present in the negative income tax. The main "con" of a welfare program is that it could disincentivize people from working. With a negative income tax, this could occur since once people earn above a certain amount, they will be charged income tax instead of receiving money transfers. This may discourage people from getting jobs that earn them an income above this amount.

Given that a negative income tax can have both pros and cons, it's imperative that if a government decides to implement a negative income tax that it does so in a judicious way to exemplify the benefits and minimize the losses that the program may incur in the economy.

Negative Income Tax Graph

How can a graph represent what it looks like to qualify for a negative income tax?

Let's take a look at the Earned Income Tax Credit graph in the United States to further our understanding.

Fig. 2 - Earned Income Tax Credit in the US. Source: IRS¹

What does the graph above tell us? It shows us the relationship between the number of children in the household and the income people must earn to qualify for the Earned Income Tax Credit in the United States. As we can see, the more children people have, the more they can earn and still qualify for the Earned Income Tax Credit. Why? The more children people have, the more resources they will need to take care of them. The same also can be said for people who are married. People who are married will earn more than someone who is single; therefore, they can earn more and still qualify for the Earned Income Tax Credit.