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In my previous blog, which you can find here, I investigated the economic rationale behind a Negative Income Tax (NIT) and a Universal Basic Income (UBI), arguing that the former exhibits greater effectiveness in combating poverty but might discourage individuals to work, while the latter incentives greater participation of low-income individuals in the labour market at the cost of a lower effectiveness in tackling poverty. However, this economic assessment is not the only lens through which these two policies can be analysed and usually fails to explain why right-wing parties tend to support a NIT while left-wing ones prefer an UBI. This political divide is mainly to be connected to the ethical – rather than the economic- differences of the two policies, with a NIT relying on a libertarian view of freedom and equality while the UBI arising from an egalitarian one.The first key aspect that distinguishes the ethical foundations of NIT and UBI relates to their perspectives on freedom. Examining freedom from a negative standpoint involves considering an individual free when they can carry out their actions without interference from others or groups (i.e., they are free from). Emphasising the concept of negative freedom is intrinsic to libertarian thinking, as it necessitates the establishment of minimal legal frameworks and a governing authority to safeguard individuals' self-determination. In contrast, from an egalitarian standpoint, an individual is deemed unfree if they lack the means necessary to pursue a goal and be autonomous, even if no other individual or institution obstructs their path. Positive freedoms can therefore be described as opportunities (i.e., they are free to), and their maximisation necessitates redistributive measures, which are ensured by a stronger and more active state.A second factor is individuals' approach to uncertainty. On one hand, the libertarian stance acknowledges that different individuals possess varying degrees of risk aversion when engaging in economic activities. This implies that individuals make choices regarding their employment status, investments, and consumption based on their unique risk preferences. In this view, the market system ensures equality of treatment among individuals. On the other hand, the egalitarian viewpoint perceives and justifies redistribution as a response to the widespread risk aversion exhibited by all individuals. This argument is rooted in the notion that, given individuals' lack of knowledge beyond moral considerations (referred to as the veil of ignorance), they would collectively support the existence of institutions dedicated to redistributing the products and benefits stemming from the arbitrary distribution of abilities and talents.Based on a libertarian view, a negative perception of freedom and a probabilistic approach to uncertainty would reject any form of equality beyond equal rights, thus opposing any form of compulsory fiscal imposition. However, assuming the necessity for the existence of such a policy, state intervention should be limited to preserving the essential tenets of libertarianism. Therefore, any public redistributive scheme should exclude any form of needs, the link with the market should be as weak as possible and the role of the state should be as less invasive as possible. In this context, a NIT scheme is often argued to be a redistributive policy that adheres to these constraints by implementing exemptions and deductions from taxable income and only taxing the portion that exceeds a certain threshold. On the other hand, a positive perception of freedom, which asserts that true freedom encompasses both the means and the rights to pursue one's desires, along with a risk-averse approach to uncertainty, leads to a policy that addresses people's needs with an unconditional requirement. This is exemplified by a UBI, which aims to meet individuals' purchasing power without imposing specific conditions.

The Negative Income Tax (NIT) and the Universal Basic Income (UBI) schemes are often mistakenly interpreted as the two sides of the same coin. This is mainly because both policies aim at tackling poverty through redistributive taxation. However, both from an economic and ethical standpoint, these two policies present differences that should not be disregarded.Economically, a NIT can be understood as a tax system associated with a tax deduction, as it proposes a scheme where at the "break-even" level of income, households pay no income tax. Above this level, households pay tax at a constantly increasing marginal rate on each additional pound while, below this level, they receive a payment of such rate at an inverse ratio. In the case of NIT, we can therefore observe a tax transfer (represented by the area NTO in Figure 1) that diminishes as income increases at a rate of -t and becomes zero when an individual's income reaches the threshold T. Once income surpasses this threshold, taxpayers begin to pay a positive tax, quantified by the area TAB.On the other hand, the UBI scheme entails the regular distribution of a uniform cash payment to individuals, irrespective of age, without any conditions attached. Realistically, a millionaire will receive the same payout as those currently on Universal Credit. Hence, in the case of UBI, the implementation of a universal and unconditional transfer ON' to all individuals causes a permanent shift along the 45° line. Following the redistribution, individuals with a gross income below OT' receive a positive benefit resulting from the disparity between the sum of UBI (represented by ON') and the taxes paid, measured by the vertical gap between the translated 45° line and the income paid by the firm. Conversely, taxpayers with an income exceeding OT' will incur a net tax payment.












































































Figure 1: Economic assessment of NIT and UBITo ensure that the total benefits provided by a NIT and UBI program are equivalent, the area ONT in the NIT scheme must equal the area ONT' in the UBI scheme, considering a normal distribution of individuals.As clearly evident in Figure 1, a NIT scheme benefits individuals with low pre-tax income, but beyond the threshold T, it disadvantages individuals who would receive a higher disposable income under the UBI option. By ensuring equal net costs for both schemes, in a NIT scheme, a minority of poor individuals is therefore supported by middle and high-income taxpayers whereas, in a UBI one, wealthier individuals contribute to redistributing income to middle and low-income individuals. A NIT program has therefore a more pronounced impact on reducing labour supply among low-income earners compared to UBI. From a distributive perspective, NIT exhibits greater effectiveness in combating poverty, but the presence of high marginal tax rates on low incomes might discourage the same individuals to work. Conversely, in the case of UBI, the lower benefits for impoverished individuals, coupled with lower marginal tax rates, incentivize greater participation of low-income individuals in the labour market at the cost of a lower effectiveness in tackling poverty.

Lorenzo is an intern at the Adam Smith Institute.Some argue that the current UK welfare state discourages people to work, rather than specifically targeting low-income individuals.An example of such policies are the Jobseeker's Allowance (JSA) and the Income Support (IS) (Niemietz, 2010). As a matter of fact, these welfare-enhancing policies impose elevated implicit marginal tax rates on the most vulnerable segments of the labour market (Blundell et al., 1998; Meghir and Phillips, 2008), essentially functioning as an additional income tax for individuals receiving transfers who strive to go back to the labour market. Consequently, they give rise to detrimental effects on labour dynamics, as clearly highlighted in Table 1. Adam et al. (2006) find indeed that, as the ratio of benefit income without work to disposable income in a low-paid occupation increases, the share of working adults strongly decreases. Despite recognising that there might not be a causal link between the two, the authors conclude that UK benefits might discourage job-seeking and return to work.












































































These policies extend economic support to a significant portion of the population including those who do not necessarily require it, rather than providing incentives for individuals with the lowest incomes to work and escape poverty. As Table 2 shows, government transfers have evolved into a regular source of income across various income levels, as opposed to being limited to those with the lowest earnings (Office for National Statistics, 2020). In 2019-2020, the 5th, 6th and 7th income decile groups, namely the middle and upper-middle class, received a higher percentage of benefits than the lowest decile group. This is mainly because the coverage of a spending programme, as opposed to its net distributional impact, is a much better predictor of its popularity (Niemietz, 2010).












































































The advantages of a Negative Income TaxA negative income tax (NIT) supplements the incomes of the poor by achieving systematic structure of marginal rates, without poverty trap problems or cliff-edges. According to Friedman (1962)'s proposed scheme, at a "break-even" level of income, households pay no income tax (Figure 1). Above this level, households pay tax at constant rate on each additional pound while, below this level, they receive a payment of such rate for each pound by which income falls short of the breakeven level tax. This net benefit can therefore be considered a "negative" income tax as it makes the income tax symmetrical. Under such a proposal, some households would now pay no taxes, others would pay less taxes than before while other households with relatively high incomes would be unaffected (Tobin et al., 1967). NIT's main advantages are therefore claimed to be reducing poverty, supplementing the incomes of low-income earners, reducing expenditure on social security, welfare and administrative costs as well as contributing to the development of social capital (Humphreys, 2001).












































































Empirical EvidenceFrom 1968 to 1980, the U.S. Government conducted four experiments on the NIT, while the Canadian government conducted one, aiming to evaluate the policy's effectiveness and economic viability. Some scholars argued in favour of the policy's success as the experiments did not find any evidence suggesting that a NIT would cause a portion of the population to withdraw from the labour force (Robins, 1985; Burtless, 1986; Keeley, 1981). On the other hand, some scholars declared the failure of the policy based on two main arguments. First, there was a statistically significant work disincentive effect for some subgroups such as primary earners in two-parent families, allowing scholars to conclude that a NIT discourages certain people to work. Second, the work disincentive would increase the cost of the program of about 10 to 200% over what it would have been if work hours were unaffected by the NIT (Rees and Watts, 1975; Ashenfelter, 1978; Burtless, 1986; Betson et al., 1980; Betson and Greenberg, 1983). Despite its theoretical economic advantages - reducing poverty by supplementing the incomes of low-income earners until they reach better paid work as well as lowering expenditure on benefits payments, welfare and administrative costs - further field research is required to assess NIT overall efficiency and economic feasibility.BibliographyAdam, S., Brewer, M. and Shephard, A. (2006) 'Financial work incentives in Britain: Comparisons over time and between family types', Working Paper 06/2006, Institute for Fiscal Studies.Ashenfelter, O., 1978. The labor supply response of wage earners. In: Palmer, J.L., Pechman, J.A. (Eds.), Welfare in Rural Areas. Brookings Institution, Washington, DC.Betson, D., Greenberg, D., (1983). Uses of microsimulation in applied poverty research. In: Goldstein, R., Sacks, S.M. (Eds.), Applied Policy Research. Rowman and Allanheld, Totowa, NJ.Betson, D., Greenburg, D., Kasten, R., (1980). A microsimulation model for analyzing alternative welfare reform proposals: an application to the program for better jobs and income. In: Haveman, R., Hollenbeck, K. (Eds.), Microeonomic Simulation Models for Public Policy Analysis, vol. 1. Academic Press, New York.Blundell, R.; Duncan A., Meghir, A., (1998) 'Estimating labor supply responses using tax reforms', Econometrica, 66, 4, 827-861.Burtless, G., (1986). The work response to a guaranteed income. A survey of experimental evidence. In: Munnell, A.H. (Ed.), Lessons from the Income Maintenance Experiments. Federal Reserve Bank of Boston, BostonFriedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.Humphreys, J. (2001). Reforming wages and welfare policy: six advantages of a negative income tax. Policy: A Journal of Public Policy and Ideas, 17(1), 19-22.Keeley, M.C., (1981). Labor Supply and Public Policy: A Critical Review. Academic Press, New York.Meghir, C. and Phillips, D. (2008), 'Labour supply and taxes', Working Paper 08/04, London: Institute for Fiscal Studies.Niemietz, K. (2010). Transforming welfare: incentives, localisation and non-discrimination. Institute of Economic Affairs.Office for National Statistics (2020) "Working and workless households in the UK: April to June 2020"Rees, A.,Watts,H.W., (1975). An overview of the labor supply results. In: Pechman, J.A.,Timpane, P.M. (Eds.),Work Incentives and Income Guarantees: The New Jersey Negative Income Tax Experiment. Brookings institution, Washington, DC.Robins, P.K., (1985). A comparison of the labor supply findings from the four negative income tax experiments. Journal of Human Resources 20 (4), 567–582.Robins, P.K., Brandon, N., Yeager, K.E., (1980). Effects of SIME/DIME on changes in employment status. The Journal of Human Resources 15 (4), 545–573.Widerquist, K. (2005). A failure to communicate: What (if anything) can we learn from the negative income tax experiments? The journal of socioeconomics, 34(1), 49-81.