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On NIT by Milton Friedman
Please help make the Manifesto better, or accept it, and propagate it!
Since very few of us fully understand the NIT, I got much of Chapter 12 of
Friedman's Capitalism and Freedom, dealing with NIT, wordprocessed (placed
below). This is such a superb exposition everyone must read each word of it.
Prof. Roy, could you pl. use your good offices with Milton Friedman to
secure his permission for the internet publication of this chapter on IPI's
web site? Grateful.
After reading this chapter closely again, I realize I have myself made a
significant error in my analysis, which I will try to correct this week.
The updated version my NIT notewill be circulated within a week to all here
and in the Plg. comm, etc. for further views.
India could not have adopted NIT 50 years or even 5 years ago. Since I am
now aware of the sea change in the use of information technology in
government in India and the greater thrust being given by Ministry of IT, I
am convinced we can adopt NIT latest within 2 years if properly executed.
The time has come to explore its details thoroughly.
The Alleviation of Poverty
by Milton Friedman
The extraordinary economic growth experienced by Western countries during
the past two centuries and the wide distribution of the benefits of free
enterprise have enormously reduced the extent of poverty in any absolute
sense in the capitalistic countries of the West. But poverty is in part a
relative matter, and even in these countries, there are clearly many people
living under conditions that the rest of us label as poverty.
One recourse, and in many ways the most desirable, is private charity. It
is noteworthy that the heyday of laissez-faire, the middle and late
nineteenth century in Britain and the United States, saw an extraordinary
proliferation of private eleemosynary organizations and institutions. One
of the major costs of the extension of governmental welfare activities has
been the corresponding decline in private charitable activities.
It can be argued that private charity is insufficient because the benefits
from it accrue to people other than those who make the gifts - again, a
neighborhood effect. I am distressed by the sight of poverty; I am
benefited by its alleviation; but I am benefited equally whether I or
someone else pays for its alleviation; the benefits of other people's
charity therefore partly accrue to me. To put it differently, we might all
of us be willing to contribute to the relief of poverty, provided everyone
else did. We might not be willing to contribute the same amount without
such assurance. In small communities, public pressure can suffice to
realize the proviso even with private charity. In the large impersonal
communities that are increasingly coming to dominate our society, it is
much more difficult for it to do so.
Suppose one accepts, as I do, this line of reasoning as justifying
governmental action to alleviate poverty; to set, as it were, a floor under
the standard of life of every person in the community. There remain the
questions, how much and how. I see no way of deciding "how much" except in
terms of the amount of taxes we - by which I mean the great bulk of us -
are willing to impose on ourselves for the purpose. The question, "how,"
affords more room for speculation.
Two things seem clear. First, if the objective is to alleviate poverty, we
should have a program directed at helping the poor. There is every reason
to help the poor man who happens to be a farmer, not because he is a farmer
but because he is poor. The program, that is, should be designed to help
people as people not as members of particular occupational groups or age
groups or wage-rate groups or labor organizations or industries. This is a
defect of farm programs, general old-age benefits, minimum-wage laws,
pro-union legislation, tariffs, licensing provisions of crafts professions,
and so on in seemingly endless profusion. Second, so far as possible the
program should, while operating through the market, not distort the market
or impede its functioning. This is a defect of price supports, minimum-wage
laws, tariffs and the like.
The arrangement that recommends itself on purely mechanical grounds is a
negative income tax. We now have an exemption of $600 per person under the
federal income tax (plus a minimum 10 per cent flat deduction). If an
individual receives $100 taxable income, i.e., an income of $100 in excess
of the exemption and deductions, he pays a tax. Under the proposal, if his
taxable income minus $100, i.e., $100 less than the exemption plus
deductions [is negative], he would pay a negative tax, i.e., receive a
subsidy. If the rate of subsidy were, say, 50 per cent, he would receive
$50. If he had no income at all, and, for simplicity, no deductions, and
the rate were constant, he would receive $300. He might receive more than
this if he had deductions, for example, for medical expenses, so that his
income less deductions, was negative even before subtracting the exemption.
The rates of subsidy could, or course, be graduated just as the rates of
tax above the exemption are. In this way, it would be possible to set a
floor below which no man's net income (defined now to include the subsidy)
could fall - in the simple example $300 per person. The precise floor set
would depend on what the community could afford.
The advantages of this arrangement are clear. It is directed specifically
at the problem of poverty. It gives help in the form most useful to the
individual, namely, cash. It is general and could be substituted for the
host of special measures now in effect. It makes explicit the cost borne by
society. It operates outside the market. Like any other measures to
alleviate poverty, it reduces the incentives of those helped to help
themselves, but it does not eliminate that incentive entirely, as a system
of supplementing incomes up to some fixed minimum would. An extra dollar
earned always means more money available for expenditure.
No doubt there would be problems of administration, but these seem to me a
minor disadvantage, if they be a disadvantage at all. The system would fit
directly into our current income tax system and could be administered along
with it. The present tax system covers the bulk of income recipients and
the necessity of covering all would have the by-product of improving the
operation of the present income tax. More important, if enacted as a
substitute for the present rag bag of measures directed at the same end,
the total administrative burden would surely be reduced.
A few brief calculations suggest also that this proposal could be far less
costly in money, let alone in the degree of governmental intervention
involved, than our present collection of welfare measures. Alternatively,
these calculations can be regarded as showing how wasteful our present
measures are, judged as measures for helping the poor.
In 1961, government amounted to something like $33 billion (federal,
state, and local) on direct welfare payments and programs of all kinds :
old age assistance, social security benefit payments, aid to dependent
children, general assistance, farm price support programs, public housing,
etc. I have excluded veterans' benefits in making this calculation. I have
also made no allowance for the direct and indirect costs of such measures
as minimum-wage laws, tariffs, licensing provisions, and so on, or for the
cost of public health activities, state and local expenditures on
hospitals, mental institutions, and the like.
There are approximately 57 million consumer units (unattached individuals
and families) in the United States. The 1961 expenditures of $33 billion
would have financed outright cash grants of nearly $6,000 per consumer unit
to the 10 per cent with the lowest incomes. Such grants would have raised
their incomes above the average for all units in the United States.
Alternatively, these expenditures would have financed grants of nearly
$3,000 per consumer unit to the 20 per cent with the lowest incomes. Even
if one went so far as that one-third whom New Dealers were fond of calling
ill-fed, ill-housed, and ill-clothed, 1961 expenditures would have financed
grants of nearly $2,000 per consumer unit, roughly the sum which, after
allowing for the change in the level of prices, was the income which
separated the lower one-third in the middle 1930's from the upper
two-thirds. Today, fewer than one-eighth of consumer units have an income,
adjusted for the change in the level of prices, as low as that of the
lowest third in the middle 1930's.
Clearly, these are all far more extravagant programs than can be justified
to "alleviate poverty" even by a rather generous interpretation of that
term. A program which supplemented the incomes of the 20 per cent of the
consumer units with the lowest incomes so as to raise them to the lowest
income of the rest would cost less than half of what we are now spending.
The major disadvantage of the proposed negative income tax is its
political implications. It establishes a system under which taxes are
imposed on some to pay subsidies to others. And presumably, these others
have a vote. There is always the danger that instead of being an
arrangement under which the great majority tax themselves willingly to help
an unfortunate minority, it will be converted into one under which a
majority imposes taxes for its own benefit on an unwilling minority.
Because this proposal makes the process so explicit, the danger is perhaps
greater than with other measures. I see no solution to this problem except
to rely on the self-restraint and good will of the electorate.
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