Negative Income Tax Plans

Abstract

AbstractThe idea of negative income tax plans and guaranteed income schemes evolved in the 1960s. The objective of negative income tax proposals was to extend the income tax rates beyond zero to negative levels. Cash transfers to families were viewed as a negative income tax. Several negative income plans have been proposed. These plans have attractive features that consider the incomes of households and their needs based on their household composition. This chapter provides a rigorous evaluation of alternative negative income tax plans. The chapter develops a general framework incorporating all the well-known negative income tax plans proposed in the literature. Based on this framework, the chapter has developed methods of comparing the progressivity and redistribution effects of alternative negative income plans. The chapter also explores how different negative income tax plans redistribute income. In other words, it looks at how such tax plans impact post-tax income inequality. If they increase inequality, such plans should be deemed anti-poor. The chapter showed analytically that negative tax plans might increase income inequality under certain conditions. A striking result emerging from this analysis is that absolute and relative inequality concepts can give conflicting conclusions about their impact on post-tax income inequality