NIT picking: The macroeconomic effects of a Negative Income Tax

Martin Lopez-Daneri

Journal of Economic Dynamics and Control, 2016, vol. 68, issue C, 1-16

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 (search for similar items in EconPapers)
JEL-codes: E13 H21 H24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:68:y:2016:i:c:p:1-16

DOI: 10.1016/j.jedc.2016.04.008

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