DEFINITION of 'Negative Income Tax - NIT'

A guaranteed minimum income plan advocated by economist Milton Friedman in 1962 where federal income subsidies are provided to persons or families whose income falls below a certain level. Negative income tax (NIT) would allow claimants to receive income through the simple filing of tax returns rather than through the claiming of welfare benefits, ideally eliminating the need for a complex welfare bureaucracy.

BREAKING DOWN 'Negative Income Tax - NIT'

The primary criticism of the negative income tax is that it discourages some low-income individuals from working. If one can receive $2,500 from the government for not working at all versus $5,000 for dozens of hours of work, some people will choose to not work because they would rather have more leisure time even if it means less money and an inability to meet basic living expenses.

Another criticism is that a negative income tax system cannot eliminate the complexities associated with the welfare system because the taxpayers who fund the subsidies demand accountability from the taxpayers who receive the subsidies. This demand necessitates a complex system of rules and oversight intended to prevent abuse of the system.

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