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Negative Income Taxes, Inequality, and Poverty

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  • Constantine Angyridis

    () (Department of Economics, Ryerson University)

  • Brennan S. Thompson

    () (Department of Economics, Ryerson University)

Abstract

We use a neoclassical growth model with heterogeneous agents to analyze the redistributive effects of a negative income tax system, which combines a flat rate tax with a fully refundable credit ("demogrant"). We show that changing the demogrant-to-output ratio causes significant changes in the distribution of income. Specifically, we find that increasing the demogrant-to-output ratio sharply reduces the level of inequality as well as both relative and absolute poverty (all measured in terms of post-tax total income). However, these reductions in inequality and poverty come at the expense of a significant reduction in output.

Suggested Citation

  • Constantine Angyridis & Brennan S. Thompson, 2012. "Negative Income Taxes, Inequality, and Poverty," Working Papers 034, Ryerson University, Department of Economics, revised Aug 2015.
  • Handle: RePEc:rye:wpaper:wp034
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    References listed on IDEAS

    as
    1. Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.
    2. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975.
    3. Brennan Thompson, 2012. "Flat rate taxes and relative poverty measurement," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(3), pages 543-551, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    negative income tax; flat tax; inequality; Lorenz dominance; relative poverty; heterogeneous agents;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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