A Negative Income Tax Plan for Maintaining Work Incentives

Abstract

Any subsidy plan for supplementing low incomes tends to reduce labor supply, to the extent leisure is not an inferior good, by raising incomes over what they would be from earnings alone. Under a constant or increasing marginal tax rate subsidy plan, this tendency is reinforced by the fact that as long as a minimum is guaranteed, the marginal income gained from an extra hour's work would be less than that for an hour of earned income. Labor supply would be maintained only by making the marginal income received greater than the amount received from earnings alone. In this article, the author presents a subsidy plan which would tie the tax benefit to the proportion of full schedule worked. He also discusses the shortcomings of the plan and concludes that it is by no means certain that work incentives would be maintained and that the labor supply would not be reduced under such a graduated plan.