Negative Income Tax

All of you might have heard about Income Tax and some of you might have paid Income Tax. But have you heard of the term ‘Negative Income Tax’. It sounds a bit counter intuitive, negative and taxes.

First Use of Negative Income Tax (NIT)

The term Negative Income Tax was first used by British politician ‘Juliet Williams’ in the 1940’s. In 1962 the great American Economist Milton freedman in his book ‘Capitalist & Freedom’ discussed the concept of Negative Income Tax.

What is Negative Income Tax?

Negative Income Tax is a tool in which the lower sections the economically backward section, the lesser income groups of the society are paid from the taxes coming from the higher section of the society. So that means Taxes are spreading across people starting from positive taxes at the higher end to negative taxes at the lower end. It is a little socialist. Let us understand this with an example, let us suppose the tax rate set by government is 25% flat and the negative income tax would also come in flat rate which would be distributed to everyone suppose it is 10,000Rs P.A.

Suppose a person is earning 40,000 Rs P.A., he is getting 10,000 Rs which the government pays him and the 25% which the government taxes back, which essentially means he is break even.

Now suppose a person earns 10 Lakh P.A., now he will also get 10,000 Rs and thus have to pay 24% tax.

 So you see the taxes which were positive and high for the upper segment of the economic blackhead end up in negative for the lower segment of the economic stature this reasoning to some sought of equalization.

There has been criticism off-course for Negative Income Tax, it is never been implemented, the criticism been that

• ·         It is very difficult to identity that who would be the intended beneficiary of the Negative Income Tax much like our PDS (Public Distribution System) or any other welfare scheme which is related to direct or in-direct tax benefits.
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• ·         The second criticism comes in fact that in a way it end the hard word and end the entrepreneurship. It would people at the bottom think that they would be any ways getting some sought of subsidy from the government and hence the labor and the people from higher end would feel that the taxes are used to cross subsidize the economy.

Negative Income Tax is always a debatable topic for economist and never the less is an interesting topic.