I’m currently on holidays and have decided to spend my time productively, watching Milton Friedman’s hit 1980s series Free to Choose. http://www.freetochoose.tv/ About two years ago, I stumbled across a copy of the companion book for this series in an OP shop. I quickly grabbed hold of the book and guarded it in case someone else wanted to buy it. Surprisingly, the book looked like it had been on the shelf for a while and it did not create the kind of excitement used copies of Harry Potter can cause. The bewildered shopkeeper seemed surprised at my excitement. On another another occasion a staff member at an op shop seemed amazed when I was clearly excited buying a TI-84 programmable calculator for only $10.

Anyway, Friedman in an episode about the welfare state raised the prospect of a negative income tax. http://en.wikipedia.org/wiki/Negative_income_tax I have provided a link to information on this idea but basically instead of having welfare payments and a massive welfare bureaucracy to administer it, you would instead get paid the equivalent of your tax free threshold and the low income offset in cash if you weren’t working and this would be phased out the more income one earns. The idea is that this would remove many of the perverse barriers to work that the interaction between the welfare system and the tax system currently produce. It would also be dramatically cheaper, Centrelink and the Employment Services industry would be largely abolished leaving only minimal paperwork to confirm how much income one earned.

 To assess this idea we need to consider how the current welfare system came about. In the early 20th century the welfare system was created with the idea that when people fall on bad times the state will help support them. This is a good idea in theory, however within one generation of the welfare states creation entire communities became completely depended on the state. Many people who would choose to work decide not to because the money they can earn in an entry level job does not exceed the value of their benefits and the value of what economists call their leisure time. This is the value people put on the time they would otherwise spend at work, for example a mother being at home with their children. Or they fear losing their welfare payments. A negative income tax would eliminate this second barrier to employment.

In a backlash by the community against those who choose not work, the people have demanded that those on unemployment are forced to look for work and in some cases work for the dole. It would be fair to say despite some success these programs have not forced many voluntarily unemployed people into work. Equally, many of those with the genuine desire to work have found themselves having to work with a welfare and employment services bureaucracy that is often demeaning and inefficient. Although these programs are popular and make the government look like they are doing something about unemployment they cannot be said to be effective.

Working in the employment services industry I have a vested interest in the current system. However, I feel that the negative income tax system has never received proper consideration and faces resistance from the welfare bureaucracy and the employment services and training sectors. This combined with the fact some people on welfare especially those are receiving what could be classed as middle class welfare will lose out making the idea politically difficult. Another problem is that welfare payments vary between groups. For example, presently pensioners receive more on the welfare system than the unemployed. Clearly, this is due to political reasons not due to any rational argument that it is cheaper for the unemployed to live than those people on pensions.

The employment and training sector under a negative income tax would be significantly smaller and would be working with clients who have voluntarily chosen to look for work and participate in study. In the show Friedman shows a technical college which is design to equip the unemployed with skills for the labour market. Then like now such schemes had a very low completion rate and had limited success. Any training government provided or subsidised under a negative income tax would only goes to those who choose to do it rather than forced to do it as a way of meeting their activity test as a condition of receiving welfare.

So the question is would a negative income tax, increase the incentive for those to who can to work, reduce the humility imposed on those who can’t by welfare rules and regulation and reduce the financial cost to the taxpayer? From what I’ve read and experienced, probably.