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Negative Income Taxes, Inequality, and Poverty

  • Constantine Angyridis

    ()

    (Department of Economics, Ryerson University)

  • Brennan S. Thompson

    ()

    (Department of Economics, Ryerson University)

We use the heterogeneous agents model of Aiyagari and McGrattan (1998) to analyze the redistributive effects of a negative income tax policy, which combines a flat rate tax with a fully refundable credit ("demogrant"). This issue has been previously considered in the context of static partial equilibrium models. 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 both inequality and relative poverty in terms of post-tax total income.

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File URL: http://economics.ryerson.ca/workingpapers/wp034.pdf
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Paper provided by Ryerson University, Department of Economics in its series Working Papers with number 034.

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Length: 28 pages
Date of creation: Aug 2012
Date of revision: Nov 2012
Handle: RePEc:rye:wpaper:wp034
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  1. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975, March.
  2. 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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