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negative income tax

Negative Income Tax (NIT)

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Negative Income Tax consists of three elements: the guarantee, the reduction rate and the break even income level.

NIT Elements for a Family of Four

Guarantee: $15,000
Reduction Rate: 27 percent
Break even income level: $55,555

The guarantee is the maximum benefit level for each family. It varies by family size and configuration. In this example, the benefit level for a family of four with no source of income other than the NIT, is equal to the guarantee of $15,000. (This is for illustrative purposes only. A description of the reasoning behind the parameters is provided in sections 2 and 3 where the options are developed more fully.)

The reduction rate comes into play when a family has sources of income other than the NIT. The reduction rate of 27 percent means that for each dollar of income other than the NIT, the NIT benefit is reduced by 27 cents. For example, if a family of four earns income of $5,000, its benefit level is reduced by 0.27 times $5,000 or $1,350. Its total benefit would therefore be $13,650 (i.e., $15,000 minus $1,350). As a result of the additional work income of $5,000, the family's total income increases by $3,650 (i.e., from $15,000 to $18,650). The $18,650 is made up of $13,650 of NIT and $5,000 of earnings.

The break even income level is the maximum income level at which NIT benefits can be received. It too varies by family size and configuration. In other words, for families with non-NIT sources of income greater than the break even income level, the NIT benefit is zero. In this illustration the break even income level is $55,555. (In NIT designs where the reduction is applied to all income from sources other than the guarantee, the break even will always equal the guarantee divided by the reduction rate (i.e., $55,555 = $15,000 divided by 0.27). If a threshold level of other income is exempted from the reduction rate, this formula will not apply.)

Under this system, it is possible to identify three groups: those receiving full benefits, those receiving partial benefits and those receiving no benefits. Families with no sources of income other than the NIT receive the full benefit of $15,000 (i.e., the guarantee). At the other extreme, families with non-NIT income over $55,555 receive no benefit. In between those extremes, families with non-NIT income between $1 and $55,554 receive a benefit equal to the guarantee reduced by 27 cents for each dollar of non-NIT income. (The formula is: benefits equals guarantee minus (non-NIT income multiplied by reduction rate).