Harry Geels: Negative income tax is better than basic income
This column was originally written in Dutch. This is an English translation.
By Harry Geels
Proponents of a basic income often use current developments as an opportunity to argue their case once again. For example, now that the rapid rise of AI may leave many people unemployed and a minimum income must be guaranteed for them quickly. However, a negative income tax is a better option.
The basic income (BI) is regularly brought up again. In a recent interview with De Morgen, Rutger Bregman spoke about the urgency of social reforms due to the rise of AI. He reaffirms his support for a universal basic income, mainly because AI could replace jobs and increase inequality. In this context, he calls a BI “an ethically and economically logical response to the challenges of technological unemployment.”
As an aside, it remains to be seen whether AI will actually destroy jobs. We thought the same thing when the internet emerged, but what changed was mainly the nature of work. This column is not about AI, but about the sense and nonsense of BI, and especially about what I believe to be a better alternative: negative income tax (NIT). Let's compare both systems and conclude with a final assessment, partly based on Milton Friedman, one of the best-known advocates of the NIB.
The differences between a BI and NIT
A basic income usually means that everyone receives a fixed amount, for example €10,000 per year, regardless of income or assets. There are no means tests or conditions attached. A NIB works differently: anyone who earns less than a certain threshold income (say €30,000) receives money from the tax authorities. The lower the income, the higher the refund. At the zero point – with no income – the difference between BI and NIT is nil: both provide a minimum subsistence income (see Figure 1).
Figure 1
Advantages and disadvantages of a basic income
Supporters of a BI argue that everyone gets the same, without stigma. They invoke the principle of universalism, which means no exclusion, even for people outside the system, such as the homeless. It would also promote autonomy. People would find it easier to choose volunteer work or entrepreneurship. There would be no poverty trap, at least if all kinds of benefits were abolished at the same time and, preferably, a flat tax were introduced.
But there are also major disadvantages. First of all, it is incredibly expensive. In addition, people who are content with a low income feel less incentive to work. Moreover, everyone is entitled to the BI, even if they have sufficient income or assets.
The introduction of a BI also creates another major “problem.” Everyone suddenly receives an extra €10,000 per year. This is likely to lead directly to inflation. If huge spending cuts are not made immediately, the necessary money will have to be printed or borrowed. We saw this happen in the US when people received COVID benefits. Inflation immediately ate up this extra money. If inflation occurs – which is highly likely – BI will be a waste of money.
Advantages and disadvantages of negative income tax
The big advantage of a NIT is that only people on low incomes receive money. It is much less expensive. ‘No money for the rich’, so public funds are spent more efficiently. There is also no need for a separate benefits agency, so there is less bureaucracy than with traditional social assistance or unemployment benefits. It fits well within existing tax structures. Furthermore, work is rewarded and there is no poverty trap. There is also (more political) flexibility, for example with the phase-out rate.
The biggest disadvantage of a NIT is often said to be that everyone must be registered with the tax authorities and have a bank account. People with variable incomes must be able to easily submit their data. And the tax authorities must be able to efficiently pay out any monthly negative taxes. In short, the challenges of implementing a NIT lie mainly in its implementation and people's digital connectivity.
Conclusion, with a twist
If we value universal rights above all else, basic income scores better. But those who think in economic, fiscal, and institutional terms can hardly ignore the negative income tax. It is fairer, more efficient, and encourages work.
Finally, a postscript: a minimum subsistence income is a basic right for everyone. Virtually all political movements agree on this, even the most libertarian. In fact, it is in the interest of society as a whole that everyone has a certain minimum income.
Even Nobel Prize winner and classical liberal Milton Friedman, together with his wife and co-author Rose, proposed a negative income tax in Free to Choose. He gave three key reasons: it simplifies the system by eliminating inefficient welfare agencies and all kinds of allowances, it provides security without discouraging work, and it guarantees individual freedom.
Friedman: “People who get on welfare (such as a BI, which is a benefit paid by a benefits agency) lose their human independence. And they become subject to the dictates and whims of their welfare supervisors, who tell them whether they can live here or there and what they will do with their lives. They are treated like children.”
It is even likely that people with a guaranteed minimum income will be strengthened in their own responsibility. And ultimately, everyone benefits from that.
This article contains the personal opinion of Harry Geels
