The Effect of a Negative Income Tax on Work Effort

Abstract

Among the many programs proposed for the reform of the welfare system, a negative income tax (NIT) is perhaps the most well known and the most durable. Despite this fame (or notoriety), an NIT signifies different things to different people and is not easy to define. To many observers, an NIT is a welfare program that would federalize the welfare system; simplify the benefit formula and streamline the payment procedures, thereby lowering administrative costs; raise the benefit level in many parts of the country to what would be regarded as a more humane level; extend coverage to families with an able-bodied male present and to families included in the working poor (i.e., those with a working head, but with an income below the poverty line). In addition, an NIT is most often thought of as a program that attempts to provide incentives to work purely by providing monetary incentives through the benefit formula, rather than by imposing a work requirement or a work registration requirement. So, an NIT attempts to provide work incentives by using a “carrot” rather than a “stick.”