By ASHER MEIRBusiness ethics 88(photo credit: )This week, after many years of preparation and promises, Israel finally launched it's so-called "negative income tax." If you are wondering why there was no fanfare surrounding the debut of this revolutionary change in our tax and welfare system, it is probably because the new program is only a pilot. It is being applied only in a few areas, and the extent of the benefit is also relatively small.
The negative income tax is one of many possible solutions to an eternal intractable conundrum in welfare policy: No decent society is willing to have its citizens live in substandard conditions. But if you unconditionally guarantee that every citizen is automatically entitled to decent living conditions even without working, then large swathes of citizenry are likely to forgo work, making it impossible to finance their entitlements. What is the solution to this? Here are three popular approaches, not necessarily mutually exclusive:
Grin and bear it
Pay off the poor, and endure the resultant high taxes and high unemployment. This is an often overlooked solution. The fact that many people are idle and living off the public purse is expensive but not inherently bad. If it were possible for the entire country to do that, as we find in some of the emirates, it could actually be quite pleasant.
John Kenneth Galbraith once pointed out that wealthy people are not against leisure when it is theirs. Every solution has its costs and benefits; this approach does have a high cost in terms of taxation and unemployment, but it provides a true safety net.
Work-fare
This approach attempts to solve the loafing problem by compelling people to find work. If you are really out of work through no fault of your own, the welfare system will provide your every need. But they will be looking over your shoulder to make sure you take a job the second you are able. This is the mirror image of "grin and bear it": it is great for the economy, since it greatly reduces the number of people eligible for benefits. But a lot of those people are pretty miserable and might really deserve benefits without having to go to work - especially single mothers of young children.
Negative income tax
The problem with the first solution is that if government policy is to make sure that everyone gets some defined income level, then as long as your income is lower than that, your tax rate is effectively 100 percent - which is a lot. In fact, it is not unusual for the tax rate to be much more than 100%; a small increase in income can suddenly terminate eligibility for a whole slew of programs (discounts on bus transportation and school books, rent subsidies, welfare payments and so on). Milton Friedman championed the idea of having a flat tax that is so flat it applies even to people getting welfare.
The idea is simple: Let's suppose you are earning NIS 1,000 and getting NIS 1,000 in benefits to round out your income to the subsistence level of NIS 2,000. And let's suppose the overall level of taxes in the country is 30%. What happens if you now double your take-home pay to NIS 2,000? In the subsistence program you would lose all your benefits - a tax rate of 100%. In the negative income tax, you would lose only 30% of your benefits; you would still be getting NIS 700 a month, despite the fact that you are earning a "respectable" NIS 2,000.
The advantage is that no one is without an incentive to work. The disadvantage, as we can easily see, is that if we have any decent level of support we end up paying welfare benefits to families who are actually at a very respectable level of income, so the program can be very expensive. The current program continues to pay benefits even when earnings are over NIS 5,000.
Another corollary is that people obviously start paying in only when their income is so high that they are no longer drawing out, so a smaller fraction of low-income households are paying taxes, which is not necessarily bad.
Bureaucratic turf wars
In Israel, the war over the negative income tax has a bureaucratic front alongside the public finance one. The welfare system is administrated by the National Insurance Institute (social security), whereas the negative income tax is administered by the Treasury, so a bit of a turf battle can be expected.
Not all turf battles are cynical, and each public body has good reasons to think they will do a better job administrating the program. I would not blame the NII for worrying that the Treasury will activate its money-saving sorcerer's apprentice and be too stingy in handing out benefits; perhaps the Treasury has the opposite worry, that the NII shows too much largesse.
Whoever administers the program, I think it is worthy trying because it rewards effort. But it is important we don't kid ourselves that it will save us public money.
Michel Stravchinsky of the Bank of Israel did a study showing that under certain conditions the program could pay for itself. But I am a bit skeptical if those conditions hold for a program with a humane level of benefits. Israel should go ahead with the pilot, and we should remind ourselves that sometimes public money is well spent, after all.
ethics-at-work@besr.orgAsher Meir is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.
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