In praise of negative income tax

ByJERUSALEM POST EDITORIAL
June 29, 2010 01:00

NIT provides incentive to get off the dole.




Money

Money. (photo credit:AP)

Neocons are frequently accused of placing almost religious faith in “invisible market forces” while callously ignoring socioeconomic gaps between rich and poor. But it was none other than Milton Friedman, the mandarin of neoconservative economic thought, who is credited with the idea of a negative income tax (NIT).

Out of a real sensitivity for those who, due to bad luck or circumstance, were left out of the prosperity provided by free, competitive markets, Friedman proposed in his 1962 book Capitalism and Freedom a unique idea. Eliminate intrusive and costly welfare bureaucracy; do away with the cadres of gray, state-salaried bureaucrats; stop welfare aid that discourages gainful employment.

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Replace them with a simple apparatus that pays cash directly to the working poor. Not only should those in the lower income tax brackets be exempt from paying income tax, they should be eligible to receive tax revenues directly from the state without any bureaucratic middlemen.

On Sunday, nearly five decades after Capitalism and Freedom first appeared, the Bank of Israel recommended expanding Israel’s own NIT experiment and implementing it nationwide. The central bank’s recommendation is based on the results of a pilot launched in September 2008 in Ashkelon, Hadera, Jerusalem and Nazareth, four towns with high unemployment and poverty. Most NIT recipients in that pilot were among the tens of thousands who work full time but fail to make ends meet, particularly families in which only one parent works. Those eligible were seniors aged at least 55 or parents aged 23 and up who earned at least NIS 1,810 but no more than NIS 5,970.


Central bank researchers reached the conclusion that NIT works. Not only did it raise 4.5 percent of the 28,800 recipients above the poverty line (8.7% among families), but it also reduced the gap between the poor and the rich. Fewer had their telephone and electricity services cut and fewer had to compromise on medical services.

Researchers estimated that if the program were expanded nation-wide, another 300,000 would be eligible, 2,300 families would be lifted above the poverty line, tens of thousands would breathe easier – all at a cost of NIS 393 million. Most important, unlike most welfare that encourages unemployment, NIT provides an incentive to get off the dole and into the job market.

HOWEVER, THE program can be improved. First, only 45% of the 64,000 who were eligible for the pilot program actually claimed the benefits after filling out the necessary forms. More advertising will plainly be needed, especially in areas with a high concentration of Arabs.

Another problem is that benefits are skimpy. The maximum NIT provided is just NIS 420 a month.

As economist Dan Ben-David pointed out in a recent Taub Center report, this is just half of what low-income Americans receive after adjusting for standard-of-living differences between the US and Israel. The higher the NIT – say 10% of per capita GDP, like in the US, instead of just 5% in Israel – the more it becomes an incentive to get a job.

Friedman, who visited Israel several times before his death in 2006 at the age of 94, was a harsh critic of socialism, including the Zionist variety. In a 1972 essay entitled “Capitalism and the Jews: Confronting a Paradox,” Friedman suggested that Israeli socialism, with its self-conscious break with the Diaspora, was an attempt to prove wrong the anti-Semitic stereotype of the Jew as a greedy capitalist.

Today Israel is powered by a vibrant capitalist economy that enabled it to weather the recent economic downturn better than many other countries.

The number of Israeli millionaires – one of many indicators of recent prosperity – rose 43% between 2008 and 2009, to 8,419. But as a Jewish state that promotes Jewish values, Israel must not lose touch with its obligation to care for those less fortunate. Implementing Friedman’s NIT is one way of achieving this goal while avoiding some of the pitfalls of socialism.

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