6 - A Simulation Analysis of the Economic Efficiency and Distributional Effects of Alternative Program Structures: The Negative Income Tax versus the Credit Income Tax

Abstract

This chapter presents a simulation analysis based on the negative income tax (NIT) versus the credit income tax (CIT) of the economic efficiency and distributional effects of alternative program structures. The essential difference between the NIT and CIT prototypes is in the structure of their marginal tax rates. The simulated NIT imposes higher marginal tax rates on transfer recipients than on those who pay positive taxes, while the simulated CIT does not distinguish between net taxpayers and transfer recipients in its tax rate structure. Both the NIT- and the CIT-simulated plans would substantially redistribute income by increasing taxes paid by those with relatively high incomes and transfers received by those with relatively low incomes. However, neither the simulated NITs nor the simulated CITs would affect economic efficiency, at least as measured by such indicators as aggregate hours of work, deadweight loss, and total earnings. The choices among alternative tax-transfer systems—between NITs and CITs —probably must mainly depend on less objective factors than economic efficiency.