DEFINITION of 'Negative Income Tax (NIT)'

Negative income tax (NIT) is an alternative to welfare suggested by, among other proponents, economist Milton Friedman in his 1962 book Capitalism and Freedom. NIT proponents assert that every American without income above the threshold for tax liability should have a basic income guarantee and that negative income tax (NIT) is a means to subsidize the needy at less cost than the welfare system.

BREAKING DOWN 'Negative Income Tax (NIT)'

To get a negative income tax (NIT) subsidy, the needy would, along with other taxpayers, simply file income tax returns. The IRS’ computerized system could then quickly and objectively identify taxpayers with income below the threshold as eligible for help.

NIT proponents envisioned negative income tax (NIT) as a mirror image of the existing tax system where tax liabilities of above-the-threshold taxpayers vary positively with income according to a tax rate schedule; and tax benefits of below-the-threshold taxpayers vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. Taxpayers with income above the threshold would pay taxes in a cash amount equal to the difference (‘positive taxes’) and taxpayers with income below the threshold would receive NIT refundable credits in a cash amount equal to the difference (‘negative taxes’).

NIT opponents applying labor-supply economic theories worried that negative income tax (NIT)’s promise of a threshold income guarantee would cause the working poor to work less or quit entirely to substitute in leisure activities since wages reduce but may not exceed the guarantee, particularly after payroll and state and local income taxes are taken out. If too many of the working poor succumbed to this income effect and this substitution effect, the swelling number of needy with income below the threshold and eligible for NIT refundable credits would make total negative income tax (NIT) costs untenable.
 

RELATED TERMS
  1. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
  2. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  3. Refundable Credit

    A refundable credit is a tax credit that can lower a taxpayer's ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household ...
  5. Taxpayer

    A taxpayer is an individual or business entity that is obligated ...
  6. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
Related Articles
  1. Taxes

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  2. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  3. Managing Wealth

    It's Not Just Trump: Meet the HINTs (High Income, No Taxes)

    Donald Trump may be the most flamboyant example, but so many affluent Americans don't pay taxes that the IRS even has a nickname for them.
  4. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  5. Taxes

    Breaking Down Taxes For Different Income Brackets

    Here is a useful rundown of how much you will pay in taxes based on your income.
  6. Taxes

    Start Over With The IRS

    If you're struggling to pay back taxes, try a fresh start with the IRS. They really can help.
  7. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  8. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  9. Taxes

    How to Reduce Risk With Tax Diversification

    Is your retirement income adequately diversified from a tax standpoint?
  10. Managing Wealth

    Who's Getting Richer? Hardly Anyone

    Federal 'economic gains' mask the truth: Most Americans are doing worse, with average incomes in 2014 smaller than in 2000. Call it upward redistribution.
RELATED FAQS
  1. How Does The Marginal Tax Rate System Work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. Learn how the marginal ... Read Answer >>
  2. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
  3. Do I need to file an income tax return every year?

    Understand if a person needs to file a tax return every year. Learn the benefits of filing a yearly income tax return even ... Read Answer >>
  4. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
Trading Center