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Milton Friedman on the NEGATIVE INCOME TAX (from a 1973 interview)

Milton Friedman – The Negative Income Tax

Milton Friedman and Margaret Thatcher were two of my heroes and I know that you can learn a great deal from their lives and their economic philosophies. Ronald Reagan and Margaret Thatcher were both were influenced by Milton Friedman. I suggest checking out these episodes of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, and – Power of the Market.

A 1973 INTERVIEW WITH MILTON FRIEDMAN – PLAYBOY MAGAZINE

It’s not my intention to violate any copyrights – just to provide the information minus the scantily clad girls:

Bertrand Russell studied economics briefly but quit because it was too easy. Max Planck, the physicist whose break-throughs in quantum mechanics were as revolutionary as Einstein’s in relativity, dropped economics because it was too hard. They were probably both right. That sort of paradox seems to agree with Milton Friedman—and to surround him. Friedman’s own reputation, for example, as the most original economic thinker since John Maynard Keynes, is due in large part to his exhaustive criticism of the theories first set forth by Keynes. There are other contradictions. Even though he had an ambiguous advisory role in the Goldwater campaign and supported Nixon’s re-election—despite the fact that Nixon has said he is now a Keynesian in matters of economic policy—Friedman calls himself a liberal. (In his book Capitalism and Freedom, he argues that “collectivists” have stolen the label.) He takes any number of positions that by themselves would appeal to the left, only to couple them with proposals that seem clearly right wing: He thinks we should close the tax loopholes—and eliminate the graduated income tax; and he is in favor of a negative income tax (in effect, a guaranteed income); but he wants to shut down Social Security.

If there is a single conceptual anchor for these proposals, it is Friedman’s deep and abiding belief in free enterprise. In his view, the free market is the best device ever conceived for ordering human affairs, and he sees it everywhere threatened by the welfare state. Laissez faire and the intellectuals who support it had once sunk to such low esteem that John Kenneth Galbraith could joke that a meeting of free enterprisers held in Switzerland after World War II broke up in disagreement over the question of whether the British navy should own or lease its battleships. It is testimony to Friedman’s tireless, good-natured efforts and the vigor of his arguments that economic ideas once regarded as hopelessly out of date are now being seriously discussed again.

In a way, Friedman is proof of his own assertions about the free market and the opportunities it affords. His parents immigrated to this country from eastern Europe and settled in Brooklyn, then in Rahway, New Jersey where Friedman grew up in working-class surroundings. Under a scholarship, he attended Rutgers University, where he studied math and was introduced to his life’s work in a course taught by Arthur Burns, who is now the chairman of the Federal Reserve Board as well as a friend and student of Friedman’s. He held a number of teaching and research jobs—encountering an occasional obstacle thrown up by anti-Semitism—before joining the faculty of the University of Chicago in 1946, the same year he took his Ph.D. from Columbia. The university has been the focal point of his life ever since, and the branch of economic thought that includes his ideas is called “The Chicago School.”

Perhaps the best example of Friedman’s migration from the wilds of economic theory to a position near center stage involves his approach to money. In his book A Monetary History of the United States, a classic in its field, he argues that the crucial factor in economic trends has been the quantity of money, not what the Federal Government is doing about taxes or spending at any given time. While not all economists were convinced, they were impressed. And early in the first Nixon Administration, Friedman’s ideas were finally implemented as well as discussed. His official influence has waned somewhat since then—Nixon subsequently introduced wage and price controls, which are anathema to Friedman—but the 60-year-old economist says, “I like to be an independent operator, anyway.”

When he’s not teaching at Chicago or traveling to a debate or lecture or testifying before a Congressional committee (“a waste of time and I generally try to get out of it”), Friedman can be found in Ely, Vermont where he and his wife, Rose, who is also an economist and edits his books, have a home near the crest of a high, gently sloping hill that gives way to the Connecticut River Valley. Friedman spends almost half of each year on this hill, writing (he has a column in every third issue of Newsweek), skiing, relaxing and enjoying the good life—all pleasures to which few of us would have access, he would remind you, in a collectivist society. Senior Editor Michael Laurence, who is Playboy’s resident financial expert, and Associate Articles Editor Geoffrey Norman visited Friedman at his hillside retreat to conduct this interview. Their report:

“Friedman is the sort of man who really lives for ideas. His home and office are piled with books, papers, manuscripts, journals and correspondence, and his talk is generally academic, though relieved by an occasional anecdote or aphorism. He clearly loves intellectual give and take—so much that in the three days of our interview, he took time out to instruct our photographer in the merits of free enterprise and to take several phone calls from people in Washington who wanted his advice on and appraisal of recent developments in international finance.

“Whoever he was talking to, Friedman showed an almost childlike enthusiasm when his mind went to work on a subject, even if it was the formulation of a program he’s been advocating since the early Fifties. There was also something about the very cogency of the man’s ideas. The unity of his vision. His consistency. Whatever one thinks of his positions, we found it impossible not to admire the skill of his arguments and his nearly Socratic use of logic. Since neither of us had ever quite fathomed pure economics or been able to understand why economists—who wield such a profound influence over all our lives—have such difficulty in agreeing on anything, we began by trying that one out on him.”

PLAYBOY: Before we deal with the negative income tax, let’s talk about your more fundamental suggestions for reform of the income tax itself.
FRIEDMAN: Well. I’d like to move toward an enormously simplified income tax, by eliminating all present deductions except for a personal exemption and substituting a flat-rate tax for the current graduated schedule. Let’s consider the deductions first. I would eliminate all personal deductions, except for strictly occupational expenses. There would be no more tax deductions for charitable contributions, for interest payments, for real-estate taxes; no more special treatment for capital-gains income, for oil depletion or for all the rest. The income tax would then be based on what it was supposed to be based on all along: individual income.
From this figure, representing his total receipts in excess of business costs, each taxpayer would be entitled to deduct a sum—a personal exemption—that reasonably reflects the cost of a survival existence in the 1970s. When the income tax was enacted, the personal exemption was supposed to assure that there would be no tax whatever on people with very low incomes. The assumption was that everybody deserved a subsistence income before he was taxed. But today, this concept has become a joke. We still have a personal exemption, but—considering the effects of inflation—it’s lower now than it’s ever been. I would double the present personal exemption, to $1500 or $1600 per person.

PLAYBOY: At what percentage of income would you place the flat-rate tax?
FRIEDMAN: If you eliminate the present deductions and retain the present personal exemption, you could scrap the current graduated rates—which run from 14 percent up to 70 percent—and raise the same amount of revenue with a flat-rate tax of around 16 percent. This sounds unbelievable, but it’s true. Our current graduated rates, while they supposedly go from 14 up to 70 percent, are fraudulent. Very few people pay taxes in the higher brackets, largely because of the loopholes we’ve heard so much about.

PLAYBOY: According to the conventional wisdom, the graduated tax is a good way to democratically redistribute wealth by allocating the revenues to social programs. Doesn’t it do that?
FRIEDMAN: The graduated tax, to the extent that it works, doesn’t redistribute wealth. Not only does most of the tax revenue from the higher income brackets not go to the poor in the form of social programs, the graduated tax also protects rather than redistributes wealth. It is, in effect, a tax on becoming wealthy. It doesn’t affect people who are already wealthy. All it does is protect them from the competition of those who would share the wealth with them.

PLAYBOY: Do you think a confiscatory inheritance tax would better solve the problem?
FRIEDMAN: There’s no such thing as an effective inheritance tax. People will always find a way around it. If you can’t pass $100,000 on to your children, you can set them up in a profitable business; if you can’t do that, you can spend the money educating them to be physicians or lawyers or whatever. A society that tries to eliminate inheritance only forces inheritance to take different forms. The human desire to improve the lot of one’s children isn’t going to be eliminated by any government in this world. And it would be a terrible thing if it were, because the desire of parents to do things for their children is one of the major sources of the energy and the striving that make all of us better off. Even an effective inheritance tax, if one could be concocted, wouldn’t prevent the transmission of wealth, but it would put an enormous damper on progress. I’ve never been able to understand the merit of the sort of equality that would chop the tall trees down to the level of the low ones. The equality I would like to see brings the low ones up.

PLAYBOY: Would your flat-rate tax bring the low ones up or would it—at the expense of those in the lower brackets—benefit primarily those who would pay less under your system than they do now?
FRIEDMAN: I think it would be fairer to almost everyone than the present system, assuming you eliminated the loopholes. After all, loopholes are nothing more than devices that allow people with relatively large incomes to avoid high taxation. The Brookings Institution, which has been looking into this, estimates that if you eliminated all the loopholes, you would increase total taxable income by something like 35 percent. Given a 21 or 22 percent average tax rate on the current base to collect current revenues, you can see that on a base a third again as large, a flat-rate tax of around 16 percent would raise the same amount of money. Personally, I can’t imagine many people saying that such a tax would be unfair. As you suggest, people who are very poor might make such a claim, with some justification. That’s why I’d also like to double the size of the present personal exemption. Then it would take a flat-rate tax of around 20 percent to yield the same amount of revenue that the current system raises.

PLAYBOY: You make it sound almost simple. Yet few knowledgeable people besides yourself have ever seriously considered such a proposal.
FRIEDMAN: That’s not necessarily an indictment of the soundness of the idea. But you have a point. The current system, with all its loopholes, makes many taxpayers—especially the influential ones, who have a large voice in government policy—think they have a vested interest in the status quo. Probably most present taxpayers would prefer the current system of taxation to the one I’ve proposed. Yet the one I propose would probably save everybody money.

PLAYBOY: But tax reform can’t save everyone money; the revenue has to come from somewhere. Surely the rich people who pay little or no taxes under the present system wouldn’t benefit by the elimination of tax loopholes.
FRIEDMAN: You’re wrong. You’re not taking into account what it costs people to avoid taxes. This is one of the most important—and most overlooked—points in the whole field of taxation. Let me give you the simplest case: municipal bonds. As you know, the income from municipal bonds is tax-free. You’re not even required to report it. For this reason, municipal bonds pay a much lower return; if corporate bonds are paying eight percent, municipals might be paying five. Suppose you buy some municipal bonds. You get the income from them, yet on the government books, no taxes on this income are recorded. But still, you do pay a tax. You pay three dollars in eight—the difference between what you could have got if you had bought corporate bonds at eight percent and what you did get buying municipals at five. That’s a 37 1/2 percent tax. It’s not recorded, but you’re still paying it. What happens, in effect, is that as a buyer of municipal bonds, you pay a 37 1/2 percent tax to the Federal Government, which turns your money immediately over to the municipality.
A better example is the oil-depletion allowance. A man drills for oil. It costs him $100,000 to drill the hole, but he expects to find only $50,000 worth of oil. Still, he drills the hole because of the tax advantage of being able to deduct the drilling cost from other income. That makes it worth while to drill. But understand, he’s not really drilling for oil, he’s drilling for tax advantage. If it weren’t for the tax laws, nobody would spend $100,000 to find $50,000 worth of oil. So there’s $50,000 of pure waste in such an undertaking. Businessmen call it buying a tax shelter.

PLAYBOY: Who actually bears this cost—the entrepreneur or taxpayers at large?
FRIEDMAN: A good question, and one not easily answered. Individuals enter such transactions, obviously, because they think others will bear most of the burden. If they thought they’d have to pay the cost themselves, they would probably never get involved. But when you have a whole nation of entrepreneurs, each seeking tax advantage, it’s impossible to say just who pays the bill. In essence, we all do. All you can say is that when a man pays $100,000 to drill a hole that will produce $50,000 in oil, $50,000 has been wasted. Given a better tax system, this waste would not have occurred. And that alone justifies changing the tax system.

PLAYBOY: The oil companies defend the depletion allowance on the ground that it encourages exploration for new oil reserves in the U.S.—reserves that might be crucial in a national emergency.
FRIEDMAN: They do, but have you ever seen them give an estimate of how much it costs to provide emergency reserves by this device rather than by others? Two different questions are involved here. First, do considerations of national defense require a large oil reserve for emergencies? Second, what is the best and cheapest way to provide such a reserve? The answer to the first question is far from clear, given the likelihood that any major war involving nuclear weapons would be extremely short. But even if the answer is yes, there are ways of providing a reserve that would be far cheaper than requiring consumers year after year to pay unnecessarily high prices for oil in order to finance exploration for additional wells, and then using the oil from these wells for current consumption, so you have to explore for still more wells.
But I’m getting away from the question you raised: whether the rich could benefit from getting rid of the loopholes. My main point is that all these wasted expenditures, tax shelters—whatever you might label these evasive maneuvers by the well-to-do few—are largely at their own expense. True, they reduce the taxes they pay, but only at a high cost. Philip Stern wrote an article in The New York Times Magazine a few months ago entitled Uncle Sam’s Welfare Program—For the Rich. His argument went like this: People like H.L. Hunt, let’s say, pay $2,000,000 a year in taxes. But if the loopholes were closed, he’d pay $20,000,000. Therefore, Stern said, the current system is the equivalent of Congress’ enacting an $18,000,000 welfare grant for Mr. Hunt, paid for by the public. This is sheer demagogic nonsense, because it completely neglects what it costs Mr. Hunt to avoid the taxes. Maybe Mr. Hunt, to avoid paying $20,000,000 in taxes, paid $16,000,000—by buying municipal bonds, digging uneconomical holes, paying high-priced tax lawyers to find new loopholes. There probably is an element of welfare for the rich, but it’s much less than many people imagine.
Joseph Pechman of the Brookings Institution has estimated that the loopholes reduce tax collections by 77 billion dollars a year. My guess—and it’s just a guess— is that this 77-billion-dollar loss in taxes through the loopholes produces no more than 25 billion dollars for the people who use them. In fact, I’d be surprised if it produced that much. The rest, as I’ve tried to explain, is simply wasted.

PLAYBOY: Under the graduated-tax system, the wealthy pay far more—in theory, at least—than those in any other income bracket. Under your proposed flat-rate system, they and everyone else would have to pay only 20 percent. But with all the loopholes at their disposal—even though you say they save less than they think by using them—don’t the rich stand to lose more than anyone else under your system, with its no-loopholes stipulation?
FRIEDMAN: Not necessarily. If I were Howard Hughes, I’d rather pay 25 percent in taxes than buy a tax shelter that costs me 50 cents on the dollar. Wouldn’t you? The only people this change would actually hurt are those who make their living by providing tax shelters for others. Statistically, these are a tiny minority. Moreover, money would be more economically invested than it is now, and these better investments would create more wealth, and thus generate more taxes, all up and down the line.

PLAYBOY: Most people would have less quarrel with the flat-rate tax than with the elimination of all personal deductions other than provable business expenses. Doesn’t a man who’s hit, say, with tremendous medical expenses one year deserve a tax break?
FRIEDMAN: I have a good deal of sympathy for the deductibility of catastrophic medical expenses—more than I do for almost any other deductions. Medical expenses are a sort of occupational expense—the cost of earning an income. But for the sake of this proposal, I’d eliminate all deductions. For any income tax to really work, it’s got to be simple and straightforward—something you can fill out on one side of one page without too much trouble. Admit one loophole and you admit them all.
As for how to cope with medical expenses if they’re nondeductible, the solution is a simple one: Buy insurance. When a man buys medical insurance, he’s betting the price of the premium that he’s going to get sick and the insurance company is betting the cost of his medical bills that he won’t. If he wins, he gets his bills paid for; if he loses, he’s out the premium. But it was his own decision—and responsibility—to buy the insurance. If hedoesn’t buy insurance, on the other hand, he’s betting that he’s not going to get sick. If he loses, my question is: Why should the rest of us have to pick up his expenses by paying in taxes for the medical bills he deducts from his return? Let him pay the bills; that’s what he risked when he bet.

PLAYBOY: But you assume that this man is a gambler, that he makes a calculated decision not to buy insurance. Don’t most people fail to buy insurance because of either ignorance or poverty?
FRIEDMAN: We’re not talking about poverty-stricken people here, we’re talking about taxpayers. As for ignorance, that’s not a valid argument. My fundamental belief is that you’ve got to hold people individually responsible for their actions.

PLAYBOY: Even as nontaxpayers, the poor can afford neither insurance nor medical expenses. Would you hold them individually responsible for such costs?
FRIEDMAN: Obviously, it bothers me, as it bothers anyone else, to see people destitute, whether through their own fault or not. That’s why I’m strongly in favor of charitable activities, whether individual or joint. One of the worst features of the current system of Social Security and welfare arrangements is that it has drastically reduced the feeling of obligation that members of society traditionally felt toward others. Children today feel far less obligation toward their parents than they did 50 years ago. If the state is going to take care of the parents, why should the children worry? Similarly with the poor. Who feels a personal obligation to help the poor? That’s the government’s job now.

PLAYBOY: To return to the point you raised earlier, you think a negative income tax will change this?
FRIEDMAN: I hope it will. But before we really get into that, let me stress one thing. If we were starting with a clean slate—if we had no government welfare programs, no Social Security, etc.—I’m not sure I would be in favor of a negative income tax. But, unfortunately, we don’t have a tabula rasa. Instead, we have this extraordinary mess of welfare arrangements, and the problem is: How do you get out of them? You can’t simply abolish them, because when we enacted these programs, we assumed an obligation to those who are now being helped by them. In fact, we have induced people to come under the protection of these programs.

PLAYBOY: What do you mean?
FRIEDMAN: I mean that the law of supply and demand works very generally. If there is a demand for poor people, the supply of poor people will rise to meet the demand. In setting up programs such as Aid to Dependent Children and all the other welfare programs, we have created a demand for poor people. Don’t misunderstand me. I’m not blaming poor people. You can hardly blame them for acting in their own interest. Take a poor family in the South, working hard for a very low income. They learn that in New York City they can get $300 a month—or whatever it is—without working. Who can blame such a family for moving to New York to get that income? The blame falls on those of us who set up the incentives in the first place. The blame also falls on us for creating a system that not only induces people to seek its benefits but forces them to stay in the program once they’re enrolled and demeans them terribly in the process of helping them.
I remember how impressed I was, six or eight years ago, when a young man who was writing a book on welfare programs in Harlem came to see me. He said, “You know, I’ve been reading Capitalism and Freedom, where you talk about the extent to which government bureaucracy interferes with the freedom of individuals. You really don’t know the extent of this. Your freedom hasn’t been much interfered with; my freedom hasn’t been much interfered with. When do we meet a government bureaucrat? Maybe when we get a parking ticket or talk about our income taxes. The people you should have been talking about,” he said to me, “are those poor suckers on welfare. They’re the people whose freedom is really being interfered with by government officials. They can’t move from one place to another without the permission of their welfare worker. They can’t buy dishes for their kitchen without getting a purchase order. Their whole lives are controlled by the welfare workers.” And he was absolutely right. The freedom of welfare recipients is terribly restricted. Whether we’re doing this for good purposes or bad, it’s not a wise thing to do. Not if we believe that individuals should be responsible for their own actions.

PLAYBOY: For those who don’t know how it works, would you explain how welfare forces people to stay on the dole once they’re enrolled?
FRIEDMAN: If someone on welfare finds a job and gets off welfare, and then the job disappears—as so many marginal jobs do—it’s going to take him some time to go through all the red tape to get back onto the program. This discourages job seeking. In the second place, if he gets a job that pays him, say, $50 or $75 a week, he’s going to lose most of that extra money, because his welfare check will be reduced accordingly—assuming he’s honest and reports it. Since he gets to keep only a small fraction of his additional earnings, there’s small incentive for him to earn.
Also, the present setup has encouraged fathers, even responsible fathers, to leave their families. Again, it’s a matter of incentives. If a man is working and has an income above the minimum, he’s not entitled to welfare. But if he deserts his family, they can receive welfare. That way, he can continue to earn his income and contribute it to his family, in addition to the welfare they get. Many ADC families are actually created by fake desertions. Of course, you have real desertions, too. If a deserted woman is going to be immediately eligible for welfare, the incentive for the family to stick together is not increased, to put it mildly. So the problem is: How do you get out of all this? And this brings us back to the question you asked a moment ago. I see the negative income tax as the only device yet suggested, by anybody, that would bring us out of the current welfare mess and still meet our responsibilities to the people whom the program has got in trouble.

PLAYBOY: How would the negative tax work?
FRIEDMAN: It would be tied in with the positive income tax. The two are similar. Ideally, I’d like to see a flat-rate tax above and below an exemption. I’ve already discussed the flat-rate tax above an exemption. The tax on income below the exemption would be a negative one. Instead of paying money, the low-income person would receive it. Consider the current tax system. If you’re the head of a family of four, with an income of roughly $4000, your personal exemptions, plus automatic deductions, plus low-income allowance, will mean that you pay no tax. Suppose you’re the same family of four with an income of $6000; you’d end up with a taxable income of $2000—that is, $6000 minus $4000—and you’d pay a fraction of that $2000 in taxes. Now suppose you had the same family of four with an income of $2000, you’d have a taxable income of minus $2000—that is, $2000 minus $4000. But under present law, with a taxable income of minus $2000, you pay no tax and that ends the business.
With a negative income tax, an income of $2000 would be subject to negative taxation. Instead of paying taxes, you’d get some money. Just how much would depend on the negative tax rate. If the negative tax rate were 20 percent, you’d get $400. If the rate were 50 percent, you’d get $1000. The 50 percent negative tax rate is simplest, so it’s the one I always like to use for illustration. If you have no income at all, for example, you would have a negative taxable income of $4000—that is, zero minus $4000. You would be entitled to receive 50 percent of that: $2000.

PLAYBOY: In other words, your system would amount to a guaranteed annual income of $2000 for a family of four?
FRIEDMAN: Yes. But it’s very important, in all systems like this, to keep in mind you’re talking about two different numbers: the minimum income, which would be guaranteed to every family or taxpayer; and the break-even point, which is the point at which people would stop receiving money and start paying it. In the example I just gave, $2000 is the base—the amount you’d receive from the government if you earned nothing at all. On the way between the base and the break-even point, which is $4000 in this example, you would receive 50 cents less from the government for every extra dollar you earned, so you’d get to keep 50 cents. This provides a consistent incentive for additional earnings. Above $4000, you’d be on your own. You’d receive nothing extra. In fact, you’d have to start paying taxes, partly to help those who are less fortunate than you.

PLAYBOY: Do you think your negative tax program would be an adequate substitute for our present welfare programs—Aid to Dependent Children, food stamps and the rest?
FRIEDMAN: I believe it would be far superior to the present programs—superior from the point of view of the recipients and also of the taxpayers. But you asked whether it would be adequate. I really don’t think you can discuss negative taxation in terms of adequacy or fairness. You have to ask a different question: How much are you and I willing to tax ourselves in order to benefit someone else? The great fallacy in these discussions is the assumption that somehow somebody else is going to pay the bill. Early in his campaign, Senator McGovern came out with a proposal to give a grant of $1000 to every person in the country. That was really a form of negative income tax, but one on a very high level. Essentially, what McGovern proposed was a $4000 guarantee for a family of four, with a $12,000 break-even point. The result would have been to sharply reduce the incentive to work for people in a very wide income range. It would have reduced the incentives for people making between $4000 and $12,000 by enabling them to collect from the government rather than pay taxes; and it would have reduced incentives for people making more than $12,000 by requiring them to pay much higher taxes. And much of the extra money collected from people making above $12,000 would have gone not to the desperately poor but to people with middle-class incomes.
We have to ask not only how much the recipients get but also who pays for it. Can you really justify taxing people receiving $13,000 a year in order to raise the income of people receiving $11,000 a year? So while I’m in favor of a negative income tax, I don’t favorany negative income tax. I want one that has both the guarantee and the break-even point low enough so that the public will be willing to pay the bill, and one where the marginal tax rate, between the guarantee and the break-even point, will be 50 percent or so, low enough to give people a substantial and consistent incentive to earn their way out of the program.

PLAYBOY: Do you think any of these proposals you’ve been discussing—on taxes, welfare, and so on—has a chance of public acceptance?
FRIEDMAN: There have been some hopeful signs. Some things I’ve been saying for a number of years now are receiving a little more attention. Some of the proposals I’ve made concerning international financial arrangements, for instance. Also, the negative income tax has become a fairly respectable notion. But you see, the problem is twofold. First, you have to sell your ideas, to convince people that government programs generally do the opposite of what their well-meaning proponents intend—that they aren’t getting their money’s worth for taxes. But even if people are convinced by the arguments, there is the problem of getting them to give up what they see as in their special interest. Everyone wants to make sure that he is getting his. Nobody will let go until he’s sure the other guy is, too. And that’s the biggest problem.

PLAYBOY: Is there a solution?
FRIEDMAN: If there is, it would be in bundling things together. That’s how we keep government out of the censorship business. It’s not a matter of taking one case at a time and deciding each case on its merits. If we did that, we would have free speech for very few. Someone would be able to get a law passed prohibiting free speech for Seventh-day Adventists. Or vegetarians. Or Black Panthers.
We talked earlier about reducing the tax rates and closing the loopholes. The right wing would be more than willing to give up the loopholes in return for lower rates; and the left wing would probably be more than willing to give up the high rates in return for closing the loopholes. So it looks as if there’s a deal to be made. But you can’t make a deal through the usual legislative channels, because neither side trusts the other—and both are right. The only way I can see to make such a deal is by a constitutional amendment that says, for example, Congress can impose an income tax as long as the only deductions are for strict occupational expenses and a personal exemption, and as long as the highest tax rate is no more than twice the lowest. Personally, I would prefer a flat rate, but to achieve consensus, it would be better to limit the degree of graduation. That would give both sides some assurance that the deal wouldn’t come unstuck.

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Milton Friedman – A Conversation On Minimum Wage

“Minimum-Wage Rates” by Milton Friedman Newsweek, 26 September 1966 ©The Newsweek/Daily Beast Company LLC

Congress has just acted to increase unemployment. It did so by raising the legal minimum-wage rate from $1.25 to $1.60 an hour, effective in 1968, and extending its coverage. The result will be and must be to add to the ranks of the unemployed. Does a merchant increase his sales by raising prices? Does higher pay of domestic servants induce more housewives to hire help? The situation is no different for other employers. The higher wage rate decreed by Congress for low-paid workers will raise the cost of the goods that these workers produce—and must discourage sales. It will also induce employers to replace such workers with other workers—either to do the same work or to produce machinery to do the same work or to produce machinery to do the work. Some workers who already receive wages well above the legal minimum will benefit—because they will face less competition from the unskilled. That is why many unions are strong supporters of higher minimum-wage rates. Some employers and employees in places where wages are already high will benefit because they will face less competition from businessmen who might otherwise invest capital in areas that have large pools of unskilled labor. That is why Northern manufactures and unions, particularly in new England, are the principal sources of political pressure for higher legal minimum-wage rates. The groups that will be hurt the most are the low-paid and the unskilled. The ones who remain employed will receive higher wage rates, but fewer will be employed. As Prof. James Tobin, who was a member of president Kennedy’s Council of Economic Advisers, recently wrote: “People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum-wage laws, trade-union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.” The loss to the unskilled workers will not be offset by gains to others. Smaller total employment will result in a smaller total output. Hence the community as a whole will be worse off. Women, teen-agers, Negroes and particularly Negro teen-agers, will be especially hard hit. I am convinced that the minimum-wage law is the most anti-Negro law on our statute books—in its effect not its intent. It is a tragic but undoubted legacy of the past—and one we must try to correct—that on the average Negroes have lower skills than whites. Similarly, teen-agers are less skilled than older workers. Both Negroes and teen-agers are only made worse off by discouraging employers from hiring them. On the-job training—the main route whereby the unskilled have become skilled—is thus denied them. The shockingly high rate of unemployment among teen-age Negro boys is largely a result of the present Federal minimum-wage rate. And unemployment will be boosted still higher by the rise just enacted. Before 1956, unemployment among Negro boys aged 14 to 19 was around 8 to 11 per cent, about the same as among white boys. Within two years after the legal minimum was raised from 75 cents to $1 an hour in 1956, unemployment among Negro boys shot up to 24 per cent and among white boys to 14 per cent. Both figures have remained roughly the same ever since. But I am convinced that, when it becomes effective, the $1.60 minimum will increase unemployment among Negro boys to 30 per cent or more. Many well-meaning people favor legal minimum-wage rates in the mistaken belief that they help the poor. These people confuse wage rates with wage income. It has always been a mystery to me to understand why a youngster is better off unemployed at $1.60 an hour than employed at $1.25. Moreover, many workers in low wage brackets are supplementary earners—that is, youngsters who are just getting started or elderly folk who are adding to the main source of family income. I favor governmental measures that are designed to set a floor under family income. Legal minimum-wage rates only make this task more difficult. The rise in the legal minimum-wage rate is a monument to the power of superficial thinking. ____________________________________________________________________________ Reprinted in Milton Friedman, An Economist’s Protest: Columns on Political Economy, pp. 144-145. Glen Ridge, New Jersey: Thomas Horton & Daughters, 1972. Compiled by Robert Leeson and Charles Palm as part of their “Collected Works of Milton Friedman” project. Reformatted for the Web. 10/25/12

Free to Choose by Milton Friedman: Episode “What is wrong with our schools?” (Part 4 of transcript and video)

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