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Negative Income Tax (NIT) and Unconditional Basic Income (UBI)

Scott Santens
Scott Santens
6 min read

A negative income tax (NIT) and an unconditional basic income (UBI) are two ways of achieving a basic income guarantee (BIG). One gives a varying amount of money according to income, and the other gives the same amount to all and taxes different amounts back. However, among basic income supporters, some of us prefer UBI and some of us prefer NIT even despite the potential for their outcomes to be identical.

Why, you might ask?

A NIT is like giving someone $50 and asking for nothing back, and a UBI is like giving someone $100 and asking for $50 from their next paycheck. Both result in the person getting an extra $50. The question of which is better depends on the details involved and how the person feels about them.

Here's a less simplified and more accurate description:

A basic income of $12,000 per year achieved using a NIT is basically making the top quintile (the top 20% of income earners) give $1,000 per month to the bottom quintile, $666 to the next quintile, $334 to the middle quintile, and $0 to the 2nd richest quintile. Now, these numbers can be different according to what the amount is set at, and the tax rates used, but that's basically the kind of outcome we'd see.

Meanwhile, a $12,000 per year UBI looks to give $1,000 per month to every quintile, and tax everyone sufficiently to accomplish that. And this can be accomplished in a variety of ways that don't even necessarily include income taxation.

To go a bit further into this comparison here's a hypothetical scenario based on your earning $36,000 right now, with a NIT, and with a UBI.


Scenario ($36,000 salary):

Example 1 (Control): You are currently drawing a salary of $3,000 per month, for a total of $36,000 per year. After taxes you net $31,000. Your taxes are automatically deducted from each paycheck, leaving you with $2,583 of disposable income each month and you owe nothing and get nothing at the end of the year.

Example 2 (NIT): You are currently drawing a salary of $3,000 per month, for a total of $36,000 per year. With a NIT threshold set at $40,000 and a tax rate of 30%, you get a NIT refund of $1,200 ($40,000 - $36,000 = $4,000 and 30% of $4,000 is $1,200). However, this isn't just a check at the end of the year. Because your salary was known, this refund was expected. So you actually received an additional check for $100 per month over the course of the year and lost nothing from your paychecks to taxes. The result is that you had $3,100 of disposable income per month ($517 more in your pocket each month), for a new NIT enhanced annual salary of $37,200 (effectively a $6,200 raise)

Example 3 (UBI): You are currently drawing a salary of $3,000 per month, for a total of $36,000 per year. With a UBI set at $12,000 and a tax rate of 30%, you pay $10,800 in taxes. Because of UBI, this leaves you with a net bonus of $1,200. However, because a UBI is paid every month, you actually received an additional $1,000 per month. In addition, because your salary was known, and because it was expected that you would be paying $10,800 in taxes (about twice the $5,000 you would have paid without UBI) about twice what would have been withheld from your paycheck is withheld for you each month. The result of this is that each month, your paycheck is $2,100 and your basic income check is $1,000. So each month you earn $3,100 ($517 more in your pocket each month), for a new UBI enhanced annual salary of $37,200 (effectively a $6,200 raise).

Comparison Summary $36,000 Salary:

$31,000 per year or $2,583 per month after tax salary

$37,200 per year or $3,000 after tax salary per month + $100 NIT  = $3,100/mo

$37,200 per year or $2,100 after tax salary per month + $1,000 UBI  = $3,100/mo

This example should make it more clear how NIT and UBI can have identical outcomes, but with a NIT focused on taxing and transferring less, and a UBI focused on taxing and transferring more.

If we hate taxing and transferring, we're probably going to lean more towards NIT, and if we hate treating people differently based on income, we're probably going to lean more towards UBI. The question becomes how many lean which ways?

Maybe a NIT is something more economists might prefer, because they are just looking at numbers, but everyone else would not prefer because of its inequality of distribution?

Maybe someone doesn't like the prospect that only poor people get a check that only rich people pay for and would instead prefer the idea of everyone getting a check and everyone paying to make that check possible in varying ways?

Maybe someone thinks rich people shouldn't get anything until they meet the definition of needing something, and that it makes no sense to tax more money than necessary, only to give it back.

So why might it make sense to tax more, when there's no need to? And what's the point of giving more only to take more back?

Well, perhaps the added taxation could be meant to affect behavior.

If this increase is added to income taxes such that top marginal tax rates are returned to 90%, maybe this would provide an incentive to not seek huge incomes at the top?

If this increase is added to the price of carbon, perhaps this would provide an incentive to reduce our use of carbon and invest in clean renewable energy resources?

If this increase is added to the purchase of luxury items, perhaps this would provide incentive for those who can afford luxury items to pay a greater amount for them, and also provide an incentive against that 5th sports car or 3rd vacation home?

If this increase is added to the price of owning undeveloped land, perhaps this would be a more fair way of handling land ownership and development in general?

If this increase decreases the amount available at the top to buy politicians, perhaps this would result in a stronger democracy that's more responsive to ordinary people?

There are a lot of reasons to see taxation as a useful tool and not something to universally hate.

Also, maybe there is value in the added complexity? Because a NIT requires people to file their taxes even if nothing is earned, that might leave people out, whereas an amount universally given to everyone would be better at avoiding any holes for people to fall through.

Or perhaps it would be far easier to just pay everyone thanks to digital technology, and then figure out what to tax away after the fact? If 80% of the population doesn't need time-intensive calculation, then it would be far more efficient to just calculate the remaining 20% instead of the full 100%.

The main difference appears to be that with a UBI, due to its universality, the cost is shifted more, and this has the potential to affect behavior. But due to all the ways in which this cost can be shifted, it can be a more or less of a net good depending on taxation specifics and intended policy goals. A poorly designed UBI can result in worse outcomes than a NIT, but a well designed UBI can result in better outcomes.

A UBI can also potentially draw more support and maintain it in the long term, whereas a NIT might be actively fought against by those not receiving it, and could lose support over time.

A NIT can only be considered vastly superior if one subscribes to the idea that all taxation is evil, and therefore should always be minimized in all possible cases it can be minimized.

A UBI can only be considered vastly superior if one subscribes to the idea that equality of distribution is of utmost importance and that anything that does not give equally is inherently flawed and/or morally wrong.

The above is in no way exhaustive and is meant to only provide a better understanding. There is plenty of further studying to be done by those who wish to even better understand the similarities and differences between a UBI and a NIT.

Here are three papers for your own research. I recommend reading each of them in their entirety:

Universal Basic Income and Negative Income Tax: Two Different Ways of Thinking Redistribution

Arguing for Basic Income: Ethical Foundations for a Radical Reform

Universal Basic Income and the Cost Objection: What are We Waiting For?

If you read all of these, or even just one of them, you'll probably walk away preferring one or the other, even though both guarantee a basic income and both as a result would profoundly improve the systemic outcomes of our respective societies.

And it's that last part I think would serve us all best to keep in mind.


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Scott Santens Twitter

Unconditional basic income (UBI) advocate with a crowdfunded basic income; Author of Let There Be Money; Senior Advisor to Humanity Forward; BasicIncomeToday.com editor; Fund for Humanity board member