Thursday, November 23, 2006

Negative income tax

Most of the articles on Milton Friedman point to his super-sharp intellect and his advocacy of small-government. The latter puts him on the same side as economic conservatives who defend free markets against meddling by government; at times, it also puts him on the side of social liberals on, for example, drugs. Since it's his defence of free markets that kept him in the limelight, he is seen, rightly, as a conservative.

But there's also another facet to this man's work that, frankly, I became aware of through the recent spate of articles on Friedman. It's his ideas on "negative income tax", which is now implemented in a narrower sense in the US as 'earned income credit'. Quite a few obituaries did mention his advocacy of this measure, but only in passing. Robert Frank has chosen to build his entire NYTimes column on this part of Friedman's work:

Market forces can accomplish wonderful things, [Milton Friedman] realized, but they cannot ensure a distribution of income that enables all citizens to meet basic economic needs. His proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer — say, $6,000 — to every citizen. A family of four with no market income would thus receive an annual payment from the I.R.S. of $24,000. For each dollar the family then earned, this payment would be reduced by some fraction — perhaps 50 percent. A family of four earning $12,000 a year, for example, would receive a net supplement of $18,000 (the initial $24,000 less the $6,000 tax on its earnings).

Mr. Friedman’s proposal was undoubtedly motivated in part by his concern for the welfare of the least fortunate. But he was above all a pragmatist, and he emphasized the superiority of the negative income tax over conventional welfare programs on purely practical grounds. If the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more. He saw no advantage in hiring armies of bureaucrats to dispense food stamps, energy stamps, day care stamps and rent subsidies. [Or, we might add, cows and buffaloes!]

Do read Frank's article; it has several other interesting ideas as well.


  1. kuffir said...

    he might be seen as a conservative in the west...or more particularly in the united states. but it's a mistake to label those who support the markets in india conservative..or those who support reforms in governance or privatization as neo-liberals or whatever. i hate this whole business of categorisation because it's borrowed, without regard for context and history, from the west...and is inadequate in describing elements of the indian polity.. as far as i can judge, the evolution of political discourse in india bears very little connection to its counterpart in the west...we have followed differing trajectories. so, it would be more accurate, in my opinion to call the ideological stream as represented by the mainstream communist parties and a large section of the congress and sections of other political parties as conservative...and the process of new ideas as initiated by narasimha rao and anmohan singh as liberal (or neo conservative, as everyone seems to so like the word) and so on...

  2. Abi said...

    Kuffir: Your point is that 'conservative' implies someone who wishes to 'coserve' what exists. Fair enough.

    On the other hand, the label 'liberal' has undergone quite a few changes over the last century. You seem to want to use it in the sense of someone who shakes things up (i.e., opposite of a conservative). I'm not so sure about this one.

    In any event, I have used these labels in the (present day) American sense, and I think I have used them consistently.

    I'm not so sure about 'neocon'. In certain circles, it's cosidered to be too dirty!

  3. kuffir said...


    my definition of conservative differs from friedman's..and is deeply rooted in my own life, experiences, country...roots. i mean conservative in the sense of those who support the status quo or those represent the dominant idea..which in india means state-directed socialism and ideas that are closely related to it. i've only recently discovered that friedman objected to the describing his ideas.
    no, my idea of a liberal (again rooted in indian realities) is someone who realizes the necessity of giving back to citizens some of the rights appropriated by the state.
    yes, neo-con is a dirty word (again, a western notion associated with the word) ..but its usage is justified in the sense that narasimha and other liberalisers acted more with the intention of 'saving' the country more than to recognize the importance of freeing citizens a little.

  4. kuffir said...

    'Till about a decade back, intelligentsia in India was a synonym for a left- wing intelligentsia.'
    that's a comment by bhupinder in the post you linked to in 'friedman's most profound...'etc.,
    don't you think he is right?..and don't you think we should start calling the people i referred to in my first comment (the mainstream left and large sections of the congress etc.,)'conservatives'?