1. CPU presentation 1 Negative Income Tax and its Relevancy to Hong Kong Wong Chack-Kie ( 王卓祺 ) Social Work Department, the Chinese University of Hong Kong 27 August 2008

2. CPU presentation2 The original Negative Income Tax proposal by Milton Friedman NIT first introduced in 1962 by the late Nobel Prize laureate Milton Friedman How the proposal works Two key components: Taxable income threshold and the rate of subsidy (0.5 or 50% tax rate)

3. CPU presentation3 Table 1 After Tax Income under a Negative Income Tax Gross Income Taxable Income Tax Paid After Tax Income $0-$600-$300$300 -$300-$150$450 $600$0 $600 $900$300$150$750 $1200$600$300$900 Taxable Income or Tax Free Threshold (TFT): $600 Tax Rate: 50%

4. CPU presentation4 The beauties of Friedman’s NIT All households or unattached individuals with income below the taxable income people will be awarded a negative income tax (benefit) It can substitute all existing welfare programmes

5. CPU presentation5 An irreconcilable dilemma in the use of taxable income level First, the generous tax benefits will discourage work incentive Second, it will extend the coverage to a larger population beyond the traditional welfare groups

6. CPU presentation6 The development of NIT Four mass experiments in the USA between 1968 & 1979 undertaken But using guarantee level, equivalent to poverty rates, to avoid work disincentive President Nixon had a NIT proposal, without substituting existing welfare programmes, rejected by Congress

7. CPU presentation7 2008, Israel has a pilot and plans to cover the rest of country in 2010 Details not known 2008, Taiwan’s new government is said to consider a NIT If NIT in its pure form, it will extend the existing 90,682 households of welfare recipients to 2 million out of 5.2 million households in Taiwan

8. CPU presentation8 Relevance of NIT to Hong Kong Whether to use taxable income or (de facto) poverty rate (CSSA) See table 3

9. CPU presentation9 Table 2 Average Payments of CSSA and Taxable Income Thresholds (HK$) No. of family members 2006-07 Average amount of CSSA* (monthly paymentx12 months) Taxable Income Thresholds Indicated by Tax Allowances(year/12 months) 13,487x12=41,844100,000/12=8,334 25,798x12=69,576200,000/12=16,667 37,809x12=93,708240,000/12=20,000 Note. * Comprising Standard Rates and Special Grants and assuming that the family has no other income. Source: Social Welfare Department and Inland Revenue Department.

10. CPU presentation10 Table 3 Hypothetical NIT Case Using Guarantee Level (CSSA rate) and Taxable Income (tax allowance) in $0 monthly income in Hong Kong No. of family members Gross Income Guaranteed level*/Taxable Income+ Tax Paid (0.5 tax rate) After Tax Income % of CSSA benefits 1$0$3,487*-$1,743.5 $1743.5-50% $0$8,334+-$4,167$4,167+19.5% 2$0$5,798*-$2,899$2,899-50% $0$16,667+-$8,334.5$8,334.5+43.7% 3$0$7,809*-$3,904.5$3904.5-50% $0$20,000+-$10,000$10,000+28% Note: The formula B=G-tY, B is benefit paid to the family, G is the “guarantee level”- the amount paid to the families with no other income; Y is the family’s income by t dollars, where t is the reduction rate, some fraction between 0-1.

11. CPU presentation11 If taxable income or tax assessment is used A larger coverage and the ethical issue of work disincentive will emerge If unadjusted poverty rate is used Similar to the existing CSSA, so a NIT in disguise

12. CPU presentation12 How about a partial NIT? For example, Earned Income Tax Credit (US), Working Tax Credit (Britain), or Working Tax Income Benefit (Canada) Only working poor are selected, the taxable income component of NIT remains

13. CPU presentation13 How a NIT in its pure form differs from a partial NIT in the case of EITC?

14. CPU presentation14 How Friedman’s NIT Works (US$) Taxable IncomeNegative Tax (Benefit)Total Income 0300 100250350 200 400 300150450 400100500 50550 6000

15. CPU presentation15 Taxable Income 600 Tax rate 50% Benefits Taxable income

16. CPU presentation16 Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005.

17. CPU presentation17 Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005.

18. CPU presentation18 Source: Center on Budget and Policy Priorities. The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor by Robert Greenstein. August 17, 2005.

19. CPU presentation19 The beauties of a partial NIT It encourages employment of the poor It is able to reduce poverty and child poverty It is likely to enjoy popular support due to its pro-work ethic inclination But Expensive cash transfer programme Need to alert over-payment (programme design issue)

20. CPU presentation20 A new system different from the existing CSSA Not to consider as ‘welfare,’ administratively not managed by SWD to avoid such perception Better to start simple with modest benefit Make it an employment subsidy Thank you!