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NIT picking: The macroeconomic effects of a Negative Income Tax |
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| Institution: | 1. University of Arkansas, United States;2. Economic Science Institute, Chapman University, United States;3. University of Alaska Anchorage, United States;1. Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E. Atlanta, GA 30309, United States;2. Marshall School of Business, University of Southern California, Los Angeles, CA 90089-0804, United States;1. Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, QC, Canada H3G 1M8;2. CIREQ, Canada |
| Abstract: | I study a revenue-neutral reform of the U.S. income tax and welfare system that involves the adoption of a Negative Income Tax (NIT). The reform is undertaken in a life-cycle economy with individual heterogeneity and uninsurable idiosyncratic labor risk. The optimal NIT consists of a 22% rate and a transfer equivalent to 11% of per-capita GDP. The ex-ante average welfare gain is a 2.1% annual increase of individual consumption. I show that a NIT outperforms a flat tax reform (income tax plus deduction) by a considerable margin. The key consequence of the reform is that high-productivity agents increase their relative importance in the labor supply at the expense of low-productivity agents. |
| Keywords: | Negative Income Tax Income tax Basic income Welfare system Efficiency Distribution |
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