Negative Income Taxes, Inequality, and Poverty
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.
|Date of creation:||Aug 2012|
|Date of revision:||Aug 2015|
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- Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975.
- Brennan Thompson, 2012. "Flat rate taxes and relative poverty measurement," Social Choice and Welfare, Springer, vol. 38(3), pages 543-551, March.
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