In his latest annual letter to shareholders, JPMorganChase CEO Jamie Dimon says the US should “dramatically expand” its current earned-income tax credit, a form of negative income tax that pays low-earners instead of asking them to pay income tax.
The idea of negative income tax is novel: In effect, it’s a kind of income tax that works in reverse.
For those who earn below a certain amount — like the poverty line — the government pays them. The US already has a program like this that benefits millions of people’s health and wallets, and President Donald Trump has proposed expanding it.
Here’s what it’s all about.
How it’s applied today
The largest example of NIT is the Earned Income Tax Credit (EITC), which serves 27 million working families in the US. It was started in 1975, under President Gerald Ford, expanded once by President Reagan, and expanded further by President Clinton.
The EITC functions like a big tax refund. If a family makes below a certain amount each year, the government will refund the tax that was withheld plus an additional amount.
President Trump wants to increase the EITC for couples making under $US64,400 a year (or individuals earning below $US31,200) to help low-income parents spend on childcare, up to a certain point. Families will also be able to deposit some of that money into a special account, which the government will match up to $US1,000 annually.
But it’s still important for government “to have eggs in other baskets” when solving poverty, rather than relying exclusively on the EITC, says Russ Whitehurst, senior fellow of economics studies at the Brookings Institution.
“Education programs that increase skill levels among the working-age population have, to date in human history, paid a consistent dividend in the form of higher overall economic activity,” Whitehurst tells Business Insider.
A hypothetical NIT, courtesy of the 1960s
Milton Friedman, the influential University of Chicago economist, started talking about NIT in 1968. He saw it as a way to help people economically without reducing their incentive to work.
He proposed a hypothetical. Let’s say the lowest income someone could pay tax on was $US3,000. For everyone who makes below that, Friedman said the government should give them 50% of the amount between the actual income and the cutoff. So if you earned $US2,000, you’d get half of the $US1,000 difference, or $US500. If you earned nothing that year, you’d get $US1,500.
In other words, a family could never earn less than half the threshold, but it also couldn’t earn the threshold itself or higher. Friedman said this was essential, because if people could earn the baseline or higher, they’d have little incentive to work at all.
Planning for a future of automated work
The idea resurfaced most recently in Dimon’s letter to shareholders.
“It is important to note that large companies generally pay well above the minimum wage and provide health insurance and retirement benefits to all their employees,” Dimon wrote. “While this would help small businesses far more than big businesses, large companies should support the expansion of this program because it would foster growth and be great for lower paid American workers.”
Dimon’s letter echoed his comments at this year’s World Economic Forum, in Davos, Switzerland, where leaders took to the idea because robotic automation now looms over a growing number of jobs. Governments may need to find ways to supplement people’s wages when employers no longer require the employee’s specific type of work.
“I think negative income tax is a big solution for the low-skilled, to give people a living wage and the dignity of a job,” Dimon said at a private lunch during the event.
Dimon’s vision of the near future is different from how most of us think about earning an income.
In the current system, people earn an income based largely on what skills they can sell in the labour market. Doctors make more than baristas because medicine requires a greater set of skills and draws from a smaller pool of candidates relative to making coffee.
As more jobs become automated, that dynamic could change. More people might work part-time and rely on supplemental income to reach a living wage.
“Maybe one day we’ll all be working four days a week and not five or six days a week,” Dimon said. “In fact, I think in Europe they’re already down to four days a week.”
However, the more jobs are automated, the less something like NIT would necessarily help people, says Jesse Rothstein, an economist at UC Berkeley.
“Even the existing EITC doesn’t get people to a livable wage,” he tells Business Insider. “So you’d need something much more generous to make up for the fact you’re only asking people to work two days a week, and to make that a livable amount of money.”
An alternative idea is universal basic income — a regular, livable wage paid to every citizen, working or not. Basic income is more extreme than NIT; advocates often take issue with the initial work requirement Friedman took for granted.
Sam Altman, president of Silicon Valley’s biggest startup accelerator, Y Combinator, has said it asks too much of people to keep working full-time (or at all) if machines already produce enough wealth to get divvied up.
“There’s this very deep-seated American ideal that work is valuable for its own sake, and there is some truth to that,” Altman says. “But I don’t think work is the only way to get a sense of being needed and community and fulfillment.”
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