This post is in response to a video as well as a discussion thread put up by Mr. Zaph. I will be putting up a more comprehensive explanation of my negative income tax idea soon. I merely wanted to clarify a few things, in case anyone else was having the same questions.
To start things off, the $7500 is non-taxable. If we wanted to get picky about it, then I could give $9868.42 a year and tax that at 24% and we’d be back to square one.
Also, the tax is much more of a relief for lower income earners than higher income earners.
Mr. Zaph brings up that under the current system, at incomes under $9600 you do not pay income tax. Under my proposal, the point where the amount of tax you pay equals the amount of tax you receive (i.e. you pay $7500 in taxes and get $7500 from the government) is achieved at $31 250. That means that all Canadians making less than that amount will actually end up with more money than they earn from work (hence the term: negative income tax). People making more than that will pay a positive tax rate, that self-adjusts to be progressive, taxing the highest earners at near the full 24%.
Mr. Zaph claims that I am cutting the tax rate by 5% for high income earners. High income earners only pay a tax rate of 29% on taxable income over $123 184. For income below that, they are paying 0% on the first $9600, 15% on the next $37 885, …
Mr. Zaph also states that the government would have to give out a lot of money (that it currently does not have) under this proposal. The key to consider here is the net change. If a person saves $1 000 dollars a year under the new system (gets $7500 from the government, but pays $6500 more in taxes), the net cost to the government is only $1000, not $7500.* So there is no need to cancel everything the government does to implement this policy. It is simply not that expensive.
The last point that I want to touch on from Mr. Zaph’s critique is the costs of simply administering the system. This system should be cheaper than the current one for several reasons:
1) There is no need for agencies reviewing people’s welfare applications.
2) The tax return system will be a lot simpler and ideally would be unnecessary as 24% can be deducted from paycheques automatically, without a need for adjustments in April.
I hope this cleared up a few things. I will be releasing a fully-detailed video soon.
*If you look at the original proposals of a negative income tax, it explains why this is happening. The original design is that there are 2 taxes, a negative percentage rate and a positive one, and as you earned more money, the negative rate became phased out. The effect is the exact same as the more modern implementation, except that the idea of a cheque and solely a positive rate is simpler to understand and requires fewer formulas.
