From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Subject: Re: Negative Income Tax (Was: Social programs)
Organization: Dept. of Computer Science, University of Ottawa
Date: Sun, 3 Jan 93 04:15:08 GMT

In article <1993Jan2.235350.22372@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
>In article <1993Jan2.203519.7135@csi.uottawa.ca> cbbrowne@csi.uottawa.ca (Christopher Browne) writes:
>>In article <1993Jan2.194938.11001@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
>>>In article <1993Jan2.034012.25456@csi.uottawa.ca> cbbrowne@csi.uottawa.ca (Christopher Browne) writes:
>>>>(b) Right now, there is an absolute DIS-incentive to work if your
>>>>income is below about $20K.  NIT would at the very least smooth the
>>>>"discontinuity" here.
>>>again, what about those who are currently working for less than $15K, who
>>>if they were smart would immediately quit their jobs under NIT?
>>
>>The case about which you speculate is one which is not made WORSE
>>under NIT; it should actually get BETTER under NIT.
>>
>>Right now, it would be advantageous for those <$15K earners to quit
>>and go on welfare.  RIGHT NOW.  They'd benefit economically from
>>quitting their job.  NIT would make it worthwhile for them to work.
>
>why? why would i work for less than $15,000 a year when i don't have to?
>when i know the government will pay me $15,000-X where X is what i earn?
>for that matter, why work for $17,000 a year when that means i'll
>be doing real work for a marginal $1 an hour?

THAT is what the current welfare system does.  People on welfare are
only permitted to earn some trivial amount of money (something like
$50/week) before it gets deducted dollar-for-dollar off of their
welfare benefits.

That's NOT the way a Negative Income Tax would work.

The typical way a NIT would work would be to treat ALL sorts of income
as taxable income.

If you want to follow what an NIT would be like, I suggest you pull
out a tax return "jacket"; the form called the T1.  I'll illustrate
with three or four examples.

We will need to take a look at Schedule 1, on which is found the
"Detailed Tax Calculation."  Since I only got a T1 Special this year,
and it doesn't have all of the details, I have to consult something
else.  Specifically, I'll be referring the infamous "Preparing Your
Income Tax Returns", published by CCH.  Since my copy of the book is
from 1991, some of the specific rates may be out of date.  However,
the forms haven't changed too significantly, nor the ordering of items
on the T1.  It does consider the tax reforms enacted in Bill C55 of
1988.

There would probably no longer be a "welfare payment" under an NIT,
but it REALLY DOESN'T MATTER if there was, so long as it is suitably
attributed.  It would probably go in the equivalent to line #235 of
the T1 Tax Return.  I'll illustrate this in example #2.

Assumptions for the sake of argument:
A) The "minimum income," I_{min} is assumed to be $10000.
B) The marginal tax rate is assumed to be 35%, combining provincial
and federal taxes.  This kind of makes Schedule 1 irrelevant; as
Schedule 1 involves a somewhat complex set of calculations.
C) Tax credits are ALL "refundable".  Ignore statements that say
things like "non-refundable tax credit", or "if negative, enter 0".
Enter the negated value whenever one occurs.

Case #1:  Person with NO income of any kind.

If there were NO welfare payment, and you had no other income, Line
260, Taxable Income, would be $0.

Heading to Schedule #1, we'd find that on line 406, the Federal Tax
would correspondingly be 35% of $0, which is , of course, $0.  This
value also heads back to Line 400 on the T1.

Line 300, the "Basic Personal Amount", which for 1992 takes on the
value $6456, is modified to the (yes, somewhat larger) value of
$28571, which represents $10,000/35%.

Since our friend also had no other tax credits, the value in line 335
will be $28571.

When we multiply this amount by 35% (rather than the 17% that is
suggested), we get $10,000.

In Step 6, Line 400 contains $0.
Line 402 contains $10,000.
Subtracting 402 from 400, we get the value $-10,000.

There are no further adjustments, and the bottom line is that line 484
indicates a refund of $10,000.

The net result:  This person gets $10,000.

Case #2:  Person with no income other than a $10,000 welfare payment.
Very much similar to Case #1.

Everything is identical to Case #1, up to Step #6.
Note that the "welfare payment" is NOT treated as income.

We come to line #401, which indicates "Federal Tax" of $0.  

Continue on to line #420, which also contains $0.

Now comes the difference:  Line #422 contains the payments during the
year of $10,000.  Subtracting it off, we get a value of $0 in line
#35, "Total Payable".  It continues on, finishing with a final balance
of $0.  The person neither pays nor gets a refund.

Net result:  This person gets $10,000, just like in Case #1.  In
practice, I think we'd actually see Case #2 happen instead of Case #1.

Case #3:  Person with employment income of $10,000.
Let's ignore the "noise" that would be introduced by considering
things like CPP/UIC deductions.  It is a relatively minor omission,
and makes the example FAR easier to understand.

This time I'll move faster:
Line #101 - Employment Income:   $10,000
Line #260 - Taxable Income:      $10,000

Line #335 - Total Credit amounts:$28,571
Line #338 - Total Tax Credits:   $10,000  (35% of line #335)

Line #401 - Federal Tax:          $3,500  (35% of line #260)
Line #402 - Total Tax Credits:   $10,000

Line #420 - Net Federal Tax:     $-6,500

Which finally results in a refund of $6,500.

Thus, the total cash receipts for this person were $16,500 for the
year.  Considerably more than $10,000.

Case #4:  Person that earned $28,571 (it's an important income level)

Line #101 - Employment Income:   $28,571
Line #260 - Taxable Income:      $28,571

Line #335 - Total Tax Credits:   $28,571
Line #338 - Total Tax Credits:   $10,000  (35% of line #335)

Line #401 - Federal Tax:         $10,000  (35% of line #260)
Line #402 - Total Tax Credits:   $10,000

Line #420 - Net Federal Tax:     $0

Which finally results in neither refund nor payout.  This is the
"break-even point."  People earning less than this will receive a net
subsidy; at this level, there is no payout.

Case #5: Person that earned $80,000

Line #101 - Employment Income:   $80,000
Line #260 - Taxable Income:      $80,000

Line #335 - Total Tax Credits:   $28,571
Line #338 - Total Tax Credits:   $10,000  (35% of line #335)

Line #401 - Federal Tax:         $28,000  (35% of line #260)
Line #402 - Total Tax Credits:   $10,000

Line #420 - Net Federal Tax:     $18,000

By the way, the NIT system is quite amenable to the modification of
the rates.  If that "Basic Personal Amount" of $28,571 is changed to
some lower value, then that corresponds to a lower subsidy.  It would
be quite plausible to have a "graduated" set of taxation rates instead
of the assumed 35%, although that would probably be a BAD thing for
the system.  The rate needs to be relatively steep, for a variety of
reasons.

>>NIT would remove the absolute advantage to quitting the game.
>
>you haven't explained why.

The examples above show why it works.

>in fact, i could argue that the "visibility" of the NIT will make it
>worse. because if what you say is true, then no-one who earns
>under $15,000 should be working now. if you make things explicit,
>it will become very clear very quickly to all making under $15,000
>that they should quit. and even those making $20,000 would realize
>they are valuing their time at $2.50 an hour!

Nope.  In the example, those making $20,000 will be valuing their time
at about $6.93 per hour.  It's less than the $10.67 that they're
grossing, but that would be true in any case.

>>The fact is, ANY choice is risky.  ANY choice might not work, for any
>>number of reasons.  That's not sufficient reason to reject ALL
>>attempts at improvement.
>
>ah, but "it's not too likely to improve things" *is* a good reason
>not to change. because change is difficult, time-consuming, and
>costly.

"Not likely to improve things" is *your* assertion.

>true, i haven't yet explained my alternative to these two
>abominations. but you can probably figure out most of it based
>on my posts. maybe we can discuss it in another thread. i'm
>just trying to keep peoples' minds open to the possibility
>of something else at this point, before this NIT is acclaimed
>without challenge (even though i know it probably will be anyway).

Call me ignorant.
Call me "too much among the trees to see the forest."
Call me whatever.
Could you please be specific about your alternative?  

About all that I can gather is that you would probably want to cut off
any payments that in any way resemble welfare.

If I'm hitting the nail on the head, then my comment is that it's not
going to be politically acceptable, and it won't happen.  I wouldn't
mind cutting off MOST of it, but that doesn't change the fact that it
still won't happen.


>>>>>2. could let private sector, free enterprise expand:
>>>>>   Ie, if Governments withdraws from running social services, and instead
>>>>>   merely hands out money, letting recipients spend it, and letting
>>>>>   the private sector compete to provide cheaper, better services.
>>>>
>>>>Good thought.
>>>
>>>as i pointed out in another post, the giving of money via the current
>>>system or the new one has nothing to do with privatization of services,
>>>which i am all for. so why wasn't it done with the current system?
>>
>>When spending goes specifically through government agencies, as is the
>>case for welfare, the law of the land makes it somewhat difficult to
>>privatize services.
>>
>>Services that lie pretty much at the commodity level are easy to
>>contract out.  The provision of "social services" is not an obvious
>>"commodity."
>
>OK, i think i know what you mean here. i was referring to the dollars
>paid out by the welfare system. you are talking about the inherent
>subsidies which are represented by free social services. i must agree
>that if NIT *really* did lead to the elimination of these services,
>that would be a plus. but the key word is "really".

I *think* I was referring to both; it may have been late at night,
though :-).

I would agree that it will be somewhat difficult to eliminate all of
'em.  But ANY improvement would be good.

>>>>>And why do we have so many different levels of subsidies, payments,
>>>>>handouts etc.? At least if we are going to stay with handouts, just
>>>>>give individuals one big lump sum. Surely the administrative costs
>>>>>would go down? 
>>>>
>>>>Even if admin. costs don't go down, it at least becomes more clear
>>>>that it IS a handout.  People can't ignore it anymore then.
>>>>
>>>>I have a feeling that the TOTAL PAYOUT would go up
>>>
>>>then NIT is unacceptable. because we need to cut the total payout.
>>>it is bankrupting us.
>>
>>If the efficiency goes up, then total COSTS may go down despite the
>>PAYOUT going up.
>
>see another post where i discussed this. the total payout is what
>is out of control. it must be addressed because it is where
>the big money is. attacking "government efficiency" is like supporting
>mom and apple pie. it's a crutch, and it's not enough.
>
>>As it stands, for every dollar that actually goes out, three are spent
>>on administration (social case workers, offices, and the likes).  It's
>>a whopping big cost.
>
>these numbers are not consistent with mine. do you have a source for
>this? also, are you including all the other social spending dollars
>which aren't subject to major administrative costs?

Which direction are you thinking?  Are you suggesting 5:1, or a "mere"
1.5:1 instead of the 4:1 that I suggested?

>>Case #2:  199X - Under NIT
>>
>>Welfare Recipient received $20000.
>>Administration cost $1000.
>
>(chuckle, chuckle)
>is this the fiction department? :^)
>c'mon, even private charities aren't that good...

No social worker was needed to compute the recipient's needs; it was
done via the income tax system which is run ANYWAYS.

>i get your point (though i don't agree with it), but let's stay
>in the realm of the living here... you have absolutely no reason
>to believe that the government will improve that much, since it
>never has in the past.

Well, do YOUR suggestions involve removing this level of
administration?  If they do, then we're assuming the same change.  If
they don't, then there's money you'll be keeping in the administration
system.

>>(let's ignore inflation/COLA here), 
>
>fine, let's ignore it here. but don't under-estimate how dangerous
>it is, and how important it is to get rid of it.

No, it didn't matter.  It would merely complicate the calculations,
and make the illustration more difficult to follow.  Such details are
for later.  And they really are irrelevant.

>>Without real numbers from some place like Stats Can, it's hard to
>>determine the exact effects of an NIT scheme; but it wouldn't be hard
>>to determine the impact of varying tax rates/minimum income levels.  I
>>suggest that you try playing with a few numbers.  It might become more
>>clear just how NIT would work.
>
>every one of these programs assumes all the wonderful things it needs
>to justify its intentions, whether they are reasonable or not. you
>assume existing systems will be dismantled, when there is no precedent
>for this, and it would be politically incorrect, and therefore
>very hard to do. you base the NIT upon theoretical efficiency improvements
>which also have little precedent. but then Clinton is going
>to "take care of the deficit" by assuming 3% growth per year. sure!
>why not? why not 4%?
>
>sorry, it's too hard to swallow with nothing to back it up but
>the usual faith and promises, and so much history to suggest otherwise.
>
>as someone once said: "fool me once, shame on you. fool me twice..."
>i personally have lost count.

Well, tell me how you're going to improve things WITHOUT changing the
system.  THAT should be VERY interesting.

-- 
Christopher Browne                |     PGP 2.0 key available
cbbrowne@csi.uottawa.ca           |======================================
University of Ottawa              | Genius may have its limitations, but
Master of System Science Program  | stupidity is not thus handicapped.
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