How to Calculate a Negative Income Tax Payment
A negative income tax payment equals the guaranteed minimum minus the clawback rate times earned income, and it reaches zero at the break-even income.
The Negative Income Tax formula
Calculator
Enter the guaranteed minimum, the clawback rate and earned income to get the net payment and the break-even income.
What a household with no earnings receives, before any clawback.
Share of each dollar earned that the payment takes back.
What the household earns from work, before the payment.
The guarantee survives the clawback by $3,000, so money flows from the tax system to the household.
- Break-even income
- $18,000
- Income after the payment
- $15,000
- Payment with no earnings
- $9,000
- Share of each extra dollar kept
- 50%
- Position
- Below break-even, receives a payment
The payment reaches zero at $18,000 of earnings, and tax begins above that.
Earnings plus the net payment leave the household with $15,000 to spend.
A household earning nothing still receives $9,000, which is the floor the scheme sets.
Earning one more dollar leaves 50% of it in the household's hands, because the rest is clawed back.
One schedule handles transfers and taxes, and the break-even income is the single point where it switches direction.
How to calculate Negative Income Tax, step by step
- 1Write down the guaranteed minimum. This is what a household with no earnings receives, so it is the payment before any clawback is applied.
- 2Multiply earnings by the clawback rate. The clawback rate is the share of each dollar earned that the payment takes back, so it works as the effective marginal tax rate on those earnings.
- 3Subtract to get the net payment. Net payment = guaranteed minimum − (clawback rate × earned income). A negative answer means the household pays tax rather than receiving money.
- 4Divide the guarantee by the clawback rate. The quotient is the break-even income, the earnings level where the payment falls to zero and ordinary tax begins.
- 5Add the payment back to earnings. Income after the payment = earned income + net payment, which is the figure that shows what the household actually has to spend.
Worked example: Negative Income Tax
Set a guaranteed minimum of $9,000 and a clawback rate of 50%. A household earning $12,000 gets a net payment of 9,000 − (0.50 × 12,000) = 9,000 − 6,000 = $3,000, so its income after the payment is 12,000 + 3,000 = $15,000. The break-even income is 9,000 ÷ 0.50 = $18,000, the point where the payment hits zero. Because half of every extra dollar is clawed back, the household keeps 50% of what it earns: going from no earnings to $12,000 lifted its resources from $9,000 to $15,000, a gain of $6,000.
Negative Income Tax questions
What does a negative net payment mean?
It means earnings sit above the break-even income, so the household pays tax that year instead of receiving money. One formula covers both directions, which is the whole point of the design.
How do you find the break-even income?
Divide the guaranteed minimum by the clawback rate. A $9,000 guarantee with a 50% clawback gives 9,000 ÷ 0.50 = $18,000, and every household earning less than that receives a payment.
Does a lower clawback rate cost more?
Yes. Cutting the rate to 25% improves the incentive to work, but it also raises the break-even income to 9,000 ÷ 0.25 = $36,000, so payments now reach far higher up the income scale.
How is this different from a universal basic income?
A negative income tax pays only households below the break-even income and shrinks the payment as earnings rise. A universal basic income pays everyone the same amount and recovers it later through ordinary taxes.
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