Negative income tax may be a reality for companies that experience low revenues or large losses during a fiscal year. This could be due to a variety of factors, such as a decrease in business or unrelated losses. If a company has a positive EBT, they will have to pay a certain percentage of taxes and their net revenues will remain positive. On the other hand, if the EBT is negative, the company will declare a negative income tax for that year.
It is possible to move the loss forward or backward to offset the positive taxable income from other years, which will reduce the tax liability for those years. The United States has also implemented the earned income tax credit, which works in a similar way and benefits millions of Americans. Net income is calculated by deducting company expenses, and depreciation is one of those expenses. The idea of a negative income tax was proposed by economist Milton Friedman, who argued that it would improve traditional social assistance by providing cash to the poor instead of a series of social benefits.
This would work by giving people a percentage of the difference between their income and an income limit, or the level at which they start paying income tax. In several examples calculated by James Mirrlees, the optimal income tax scheme appears to be roughly linear, with a negative tax for low income. Unlike a standard income tax, where people pay money to the government, people with low incomes receive money from the government. In 1975, the United States implemented a negative income tax for the working poor through the earned income tax credit.
Friedman argued that this system would not destroy the incentive to work, compared to guaranteed income programs (GIP) with an effective marginal tax rate of 100%. A 1995 survey revealed that 78% of U. S. economists supported (with or without conditions) incorporating a negative income tax into the welfare system.
While people would still lose benefits as they earned more money, with a negative income tax they would always come out ahead with higher incomes. Net income is calculated by subtracting all expenses from total income, including costs of doing business such as expenses, taxes, depreciation and interest on debt. In economics, a negative income tax (NIT) is a system that reverses the direction in which taxes are paid on income below a certain level; in other words, those who earn above that level pay money to the state, while those who earn below receive money.
