Negative Taxes and Monetary Incentives to Work: The Static Theory

Abstract

The note examines how negative income taxation may influence incentives to work. The model indicating the income-leisure trade-off is used in both graphical and algebraic forms. The analysis indicates that if both income and leisure are normal goods, and if preference patterns are not changed as a result of implementation of a negative income tax plan, utility maximizing individuals will choose to work less in the presence of negative tax payments than in their absence. How much less depends on the level of the income guarantee, the negative (marginal) tax rate, and the shape of the utility function.