Will SCC’s homeless high school senior payouts backfire? Economist expresses worries

This August, the SCC Board of Supervisors approved a proposal to distribute $1,000/month to every local homeless high school senior. City Journal’s Guy Sorman breaks down this concept, also known as the negative income tax (NIT). He highlights the dangers of giving identical payouts regardless of income, as well as simply adding a program to existing welfare initiatives (which could lead to students seeking less employment opportunities). To receive daily updates of new Opp Now stories, click here.

The NIT is easy to describe. “The basic idea,” [Free market economist] Friedman wrote in a 1968 Newsweek column, “is to use the mechanism by which we now collect tax revenue from people with incomes above some minimum level to provide financial assistance to people with incomes below that level.” Already, he pointed out, no one pays taxes on the first few thousand dollars of income, thanks to personal exemptions and deductions. Most earners pay a fraction of their “positive taxable income”—that is, the amount by which their earnings exceed that first few thousand dollars. In Friedman’s plan, the poor would similarly receive a fraction of their “negative taxable income”—the amount by which their earnings fell short of that level. This direct cash grant would replace all other welfare programs for the poor, which, Friedman rightly observed, were generating a huge bureaucracy and extensive welfare dependency.

But wouldn’t the NIT—in effect, a government-guaranteed income—still be a disincentive to work, just as no-questions-asked welfare benefits were before being reformed in the 1990s? “Any state intervention, any income redistribution, creates disincentives and distortions,” admits Gary Becker, a University of Chicago economist and Friedman disciple. “But if society decides that a certain level of redistribution must take place, the NIT is the best, the most minimally distorting, solution ever devised.” To limit the disincentive, Friedman argued, the NIT should be progressive. Say the government drew the income line at $10,000 for a family of four and the NIT was 50 percent, as most economists recommend. If the family had no income at all, it would receive $5,000—that is, 50 percent of the amount by which its income fell short of $10,000. If the family earned $2,000, it would get $4,000 from the government—again, 50 percent of its income shortfall—for a total post-tax income of $6,000. Bring in $4,000, and it would receive $3,000, for a total of $7,000. So as the family’s earnings rise, its post-tax income rises, too, preserving the work incentive. This is very different from many social welfare programs, in which a household either receives all of a benefit or, if it ceases to qualify, nothing at all. The all-or-nothing model encourages what social scientists call “poverty traps,” tempting the poor not to improve their situations…

Another former Reagan advisor, Martin Anderson—now, like Shultz, a fellow at the Hoover Institution at Stanford—fears that an NIT would simply be added to, rather than replace, existing programs; politicians are better at piling on benefits than at reengineering the state, he points out.

This article originally appeared in City Journal. Read the whole thing here.

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