Negative income tax

About: Negative income tax is a research topic. Over the lifetime, 425 publications have been published within this topic receiving 15195 citations.

Capitalism and Freedom

Abstract: In the classic bestseller, Capitalism and Freedom, Milton Friedman presents his view of the proper role of competitive capitalism--the organization of economic activity through private enterprise operating in a free market--as both a device for achieving economic freedom and a necessary condition for political freedom. Beginning with a discussion of principles of a liberal society, Friedman applies them to such constantly pressing problems as monetary policy, discrimination, education, income distribution, welfare, and poverty. "Milton Friedman is one of the nation's outstanding economists, distinguished for remarkable analytical powers and technical virtuosity. He is unfailingly enlightening, independent, courageous, penetrating, and above all, stimulating."-Henry Hazlitt, Newsweek "It is a rare professor who greatly alters the thinking of his professional colleagues. It's an even rarer one who helps transform the world. Friedman has done both."-Stephen Chapman, Chicago Tribune

Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses

Abstract: This paper investigates the optimal income transfer problem at the low end of the income distribution. The government maximizes a social welfare function and faces the traditional equity-efficiency trade-off. The paper models labor supply behavioral responses along the intensive margin (hours or intensity of work on the job) and along the extensive margin (participation in the labor force). Optimal tax formulas are derived as a function of the behavioral elasticities, the shape of the income distribution and the redistribution tastes of the government. When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support that is taxed away at high rates. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is an Earned Income Credit program with negative marginal tax rates at low income levels and a small guaranteed income. Numerical simulations calibrated with the actual empirical earnings distribution are presented for a range of behavioral elasticities and redistributive tastes of the government. For realistic elasticities, the optimal program provides a moderate guaranteed income, imposes low tax rates on very low annual earnings levels, and then starts phasing out benefits at substantial rates.

The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment

Abstract: A model of labor supply is formulated which takes explicit account of nonlinearities in the budget set which arise because the net, after-tax wage depends on hours worked. These nonlinearities may lead to a convex budget set due to the effect of progressive marginal tax rates, or they may lead to a nonconvex budget set due to the effect of government transfer programs such as AFDC or a negative income tax. The nonlinearities affect both the marginal wage and the "virtual" nonlabor income which the individual faces. The model is estimated on a sample of prime-age males from the Gary negative income tax experiment.

Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses

Abstract: This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin (intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided.

The Economics of "Tagging" as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning

Abstract: The advantages of a negative income tax are easy to describe. Such a tax typically gives positive work incentives to even the poorest persons. With some forms of the negative income tax there are no incentives for families to split apart to obtain greater welfare payments. Furthermore, individuals of similar income are treated in similar fashion, and therefore it is fair and also relatively cheap and easy to administer. In contrast to these advantages of a negative income tax, the advantages of a system of welfare made up of a patchwork of different awards to help various needy groups are less easy to describe and also less well understood. Such a system uses various characteristics, such as age, employment status, female head of household, to identify (in my terminology to "tag") groups of persons who are on the average needy. These groups are then given special treatment, or, as the economist would view it, they are given a special tax schedule different from the rest of the populace. A system of tagging permits relatively high welfare payments with relatively low marginal rates of taxation, a proposition which will be explained presently and discussed at some length.