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2021 | OriginalPaper | Chapter

3. The Age of Negative Income Tax Experimentation (the 70s)

Author : Prof. Wayne Simpson

Published in: Is Basic Income Within Reach?

Publisher: Springer International Publishing

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Abstract

By 1967, some form of negative income tax was viewed as a leading policy candidate to provide an effective poverty reduction strategy for the U.S., but concerns about work incentives and the administration of an unconditional cash transfer of this kind led to proposals for a series of scientific experiments rather than a full-blown basic income plan. This chapter reviews the issues and lessons associated with the design, implementation and analysis of the four income maintenance experiments conducted in a tightly woven time frame in the U.S. between 1969 and 1975. While the experiments eventually provided evidence of relatively small work disincentive effects, those results were too late and too poorly understood to help Nixon’s Family Assistance Plan, a negative income tax proposal, which failed in the U.S. Senate.

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previous chapter Emergence of the Basic Income Concept as a Negative Income Tax (the 60s)

next chapter Basic Income Beyond the Negative Income Tax (the 80s and 90s and a Bit Before)

The Institute for Research on Policy continues to this day as an nonpartisan, multidisciplinary center at the University and currently serves as the only funded National Poverty Research Center in the U.S.: https://www.irp.wisc.edu/about-irp/.

Bipartisan support was necessary, as the Democrats had significant majorities in both the House of Representatives and the Senate before and after the 1968 election.

Just as Nixon was to emphasize “workfare” rather than “welfare” and “work incentives” rather than “guaranteed income,” the OEO preferred “income maintenance” to either of these terms or “negative income tax.” Salesmanship seemed to require a constant renaming of what was a NIT design throughout and what is today still the most common understanding of a basic income in North America.

Mathematica, spun off from Market Research Corporation of America, continues as an employee-owned company with offices across the U.S. providing consulting services that include social experimentation: https://www.mathematica.org/.

The poverty line used for the NJ IME was generally 5–15% lower than the official poverty line established by the Social Security Administration (Kershaw and Fair 1976).

The designers took exception to the exclusive reliance of the official poverty lines on basic nutritional needs and developed similar but only slightly lower figures: $3300 for a family of four compared to $3335 from the Social Security Administration, a difference of only 1% (Skidmore 1975).

Although these roughly correspond to the questions of the size of the income and substitution effects discussed earlier, changes in the tax rate (after-tax wage) would also affect income and need to be accounted for.

The normal approximation to the binomial distribution for large samples predicts that, for a sample of the size used in the NJIME, the proportion of heads would be 50% $\pm$ 2.66% or in the range [47.34%, 52.66%] 95% of the time or 19 times out of 20.

This was the essence of the argument for a RCT to provide credible estimates of work incentives. The random design would ensure that family and site characteristics, which could be associated with differences in earned and unearned income and labour supply in any non-experimental situation, would be orthogonal to (uncorrelated with) the assigned treatment, yielding reliable estimates of the experimental impact in sufficiently large samples.

The research was published later as Conlisk and Watts (1979) but earlier versions can be found in the American Statistical Association Proceedings, Social Sciences Section (1969) and an undated NJ IME working paper at http://www.asasrms.org/Proceedings/y1969/A%20Model%20For%20Optimizing%20Experimental%20Designs%20For%20Estimating%20Response%20Surfaces.pdf.

The Denver site was added to the Seattle experiment and began field operations a year later in 1972.

Hausman and Wise (1976) analyse the impact of income truncation on the estimation of labour supply response in the NJ IME.

This “dowry effect” was a concern that would not exist in a universal plan, since anyone leaving a family would be eligible for the same NIT benefits and would be equally attractive as a partner.

This was to become the NJ IME practice, rather than simply reconciling income annually, as we discuss in the next section.

This situation was more common than might have been expected because of the Conlisk-Watts assignment, which oversampled families near the breakeven income level. We discuss this issue further in the next section.

One important distinction to which we shall return is a NIT program to replace existing welfare and other cash assistance programs, as in the experiments, and a NIT program to top up the existing welfare and cash assistance, as in the Family Assistance Plan proposal. (This has come to be known as the distinction between a full and partial basic income.) The distinction has implications for the design and operation of a NIT or other form of basic income system.

See, for example, the SIME/DIME final report overview at: https://aspe.hhs.gov/report/overview-final-report-seattle-denver-income-maintenance-experiment/design-and-implementation-simedime.

By the end of 1975, the New Jersey, Rural, Gary and Seattle-Denver three-year experiments were completed, leaving only the five-year and 20-year participants in SIME/DIME in the field. Of course, activities related to data development and analysis would continue in the aftermath of field operations for each experiment.

Another good example is the runaway inflation that hit the final income maintenance experiment in Manitoba, a matter we discuss separately in Chapter 6.

This amounts to a standard analysis of variance (ANOVA) or analysis of covariance (ANCOVA) statistical methodology to estimate the experimental effects.

SIME/DIME had 4800 participants whereas the other three experiments combined had only a total of 3965, but SIME/DIME also had more generous treatments (see Table 3.2) which may have elicited stronger responses. On the other hand, combining the results for the Seattle Denver sites was problematic given the stark differences in the local labour markets at the time.

This analysis ignores the extensive margin of labour supply associated with labour force participation, as was the practice at the time the experiments were analysed.

A perfectly inelastic (Marshallian) supply curve has an elasticity of zero, indicating that hours do not respond to a change in after-tax wages once the price (substitution) and income effects are both considered.

These results are summarized in Tables 2.2, 3.2 and 3.3 of Hum and Simpson (1991). The distinction between the early and later literature, or first and second generation labour supply analysis, is derived from Killingsworth (1983).

Modern literature distinguishes between the internal and external margins of labour supply and these estimates refer to the internal margin. McClelland and Mok also find a likely range for the participation elasticity (external margin) that is small: 0.0–0.1 for men and single women and 0–0.3 for married women.

Income elasticity estimates have generally been less controversial and smaller than substitution elasticity estimates by a factor of 2–4.

While this seems reassuring, cynics might argue that these self-reported expenditures could have conveniently excluded what NIT recipients knew to be socially disapproved items; it is not clear how evidence could be collected even today to satisfy such skepticism.

Rossi (1975) interpreted this response as a wage subsidy effect, which would arise if the assigned NIT plan raised an individual’s after-tax wage, but this effect was not tested directly and remains conjectural.

There is also the contrary finding that families receiving subsidies for social services in the Gary IME used less of those services than untreated families.

The Democratic Vice-Presidential candidate was Sargent Shriver, who we met earlier in this chapter as the director of the Office of Economic Opportunity during its formative years.

Aaron, Henry. 1975. Cautionary Notes on the Experiment. In Work Incentives and Income Guarantees: The New Jersey Negative Income Tax Experiment, ed. Joseph Pechman and Michael Timpane, 88–110. Washington, DC: The Brookings Institution.

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Title: The Age of Negative Income Tax Experimentation (the 70s)
Author: Prof. Wayne Simpson
Publisher: Springer International Publishing
Book: Is Basic Income Within Reach?
Print ISBN: 978-3-030-66084-0

Electronic ISBN: 978-3-030-66085-7

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-66085-7_3

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