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Negative Income Tax and its Relevancy to Hong Kong

Negative Income Tax and its Relevancy to Hong Kong. Wong Chack-Kie ( 王卓祺 ) Social Work Department, the Chinese University of Hong Kong 27 August 2008. NIT first introduced in 1962 by the late Nobel Prize laureate Milton Friedman How the proposal works

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Negative Income Tax and its Relevancy to Hong Kong

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  1. Negative Income Tax and its Relevancy to Hong Kong Wong Chack-Kie (王卓祺) Social Work Department, the Chinese University of Hong Kong 27 August 2008 CPU presentation

  2. NIT first introduced in 1962 by the late Nobel Prize laureate Milton Friedman How the proposal works Two key components: Taxable income threshold and the rate of subsidy (0.5 or 50% tax rate) The original Negative Income Tax proposal by Milton Friedman CPU presentation

  3. Table 1 After Tax Income under a Negative Income Tax Taxable Income or Tax Free Threshold (TFT): $600 Tax Rate: 50% CPU presentation

  4. The beauties of Friedman’s NIT • All households or unattached individuals with income below the taxable income people will be awarded a negative income tax (benefit) • It can substitute all existing welfare programmes CPU presentation

  5. An irreconcilable dilemma in the use of taxable income level • First, the generous tax benefits will discourage work incentive • Second, it will extend the coverage to a larger population beyond the traditional welfare groups CPU presentation

  6. The development of NIT • Four mass experiments in the USA between 1968 & 1979 undertaken • But using guarantee level, equivalent to poverty rates, to avoid work disincentive • President Nixon had a NIT proposal, without substituting existing welfare programmes, rejected by Congress CPU presentation

  7. 2008, Israel has a pilot and plans to cover the rest of country in 2010 • Details not known • 2008, Taiwan’s new government is said to consider a NIT • If NIT in its pure form, it will extend the existing 90,682 households of welfare recipients to 2 million out of 5.2 million households in Taiwan CPU presentation

  8. Relevance of NIT to Hong Kong • Whether to use taxable income or (de facto) poverty rate (CSSA) • See table 3 CPU presentation

  9. Table 2 Average Payments of CSSA and Taxable Income Thresholds (HK$) Note. *Comprising Standard Rates and Special Grants and assuming that the family has no other income. Source: Social Welfare Department and Inland Revenue Department. CPU presentation

  10. Table 3 Hypothetical NIT Case Using Guarantee Level (CSSA rate) and Taxable Income (tax allowance) in $0 monthly income in Hong Kong Note: The formula B=G-tY, B is benefit paid to the family, G is the “guarantee level”- the amount paid to the families with no other income; Y is the family’s income by t dollars, where t is the reduction rate, some fraction between 0-1. CPU presentation

  11. If taxable income or tax assessment is used • A larger coverage and the ethical issue of work disincentive will emerge • If unadjusted poverty rate is used • Similar to the existing CSSA, so a NIT in disguise CPU presentation

  12. How about a partial NIT? • For example, Earned Income Tax Credit (US), Working Tax Credit (Britain), or Working Tax Income Benefit (Canada) • Only working poor are selected, the taxable income component of NIT remains CPU presentation

  13. How a NIT in its pure form differs from a partial NIT in the case of EITC? CPU presentation

  14. How Friedman’s NIT Works (US$) CPU presentation

  15. Taxable Income 600Tax rate 50% Benefits Taxable income CPU presentation

  16. Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005. CPU presentation

  17. Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005. CPU presentation

  18. Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005. CPU presentation

  19. The beauties of a partial NIT • It encourages employment of the poor • It is able to reduce poverty and child poverty • It is likely to enjoy popular support due to its pro-work ethic inclination • But • Expensive cash transfer programme • Need to alert over-payment (programme design issue) CPU presentation

  20. A new system different from the existing CSSA • Not to consider as ‘welfare,’ administratively not managed by SWD to avoid such perception • Better to start simple with modest benefit • Make it an employment subsidy • Thank you! CPU presentation

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