A Problem With Negative Income Tax Proposals

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Posted by on October 13, 2016

I frequently hear it proposed that we should institute a negative income tax or similar form of guaranteed minimum income, funded by removing parts of the existing welfare and social services system. Simple economic analysis suggests that the welfare system is spectacularly wasteful, compared to simple cash transfers, and that tearing it down is obviously correct.

It isn’t.

Consider the food-stamp programs run by most states. People whose income is low enough receive funds whose use is restricted, so that it can be used to purchase food – but not to purchase anything else. Trading food stamps for regular dollars or inedible goods and services is illegal for both the buyer and the seller. A naive economic model suggests that this is bad: people know what they need better than bureaucrats do, and if someone would rather spend less on food and more on housing or car maintenance or something, they’re probably right about that being the right thing to do. So food-stamp dollars are worth less than regular dollars, and by giving people food-stamp dollars instead of regular dollars, value is destroyed. This is backed up by studies analyzing poor peoples’ purchases when given unrestricted funds; those purchases tend to be reasonable.

This is a Chesterton Fence. Tearing it down would be a terrible mistake, because it has a non-obvious purpose:

The reason you give poor people food-stamp dollars instead of regular dollars is because they’re resistant to debt collection, both legal and illegal, resistant to theft and resistant to scams.

There are organizations and economic forces that are precisely calibrated to take all of the money poor people have, but not more. If you give one person unrestricted money, that person is better off. But if you give everyone in a poor community extra money, then in the long run rents, drug prices, extortion demands and everything else will rise, compensating almost exactly.

We have a government which says to its poor people: you may be scammed out of your money, your access to every luxury, and even your home, by anyone who can trick you into signing the wrong piece of paper. But we draw the line at letting you be scammed out of your access to food.

A negative income tax would erase that line. I haven’t heard anyone raise this as a problem, which sets an upper bound on how carefully people (that I’ve read) have thought about the issue. This worries me greatly. Can this issue be patched? And, thinking about it from this angle, are there more issues lurking?

(Cross-posted on Facebook)

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