Tax Theory Negative Income Tax

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TAX THEORY NEGATIVE INCOME TAX ECON 3376 MARCH 30th 2012 Many people in the last few decades have argued for and against a Negative Income Tax but any country has never really implemented it. This paper aims to provide an account of the Negative Income Tax (NIT) system in a society and how the tax can be utilized in an economy it will additionally discuss the possible effects, both positive and negative that it could have on the tax system, society and the economy at large. A negative tax system is a system of taxation or income support program that provides individuals or families a guaranteed basic annual income even when they have zero earnings. A negative Income tax can also be referred to as a Guaranteed Annual Income (GAI), a Basic Income or a Guaranteed Adequate Income. It has been the subject of much discussion over the past few years in Canada and the United States. An experiment on the GAI was conducted in Winnipeg and Dauphin Manitoba in the 1970’s. The experiment was inconclusive and a report was not officially made public but this experiment did show that there was little influence in terms of work disincentive and the subjects of this experiment did not stop working and did not cut down on their working hours so as to work less the impact of a Guaranteed income did not reduce their working incentive by a large percentage as was expected. This however was not the exact case in the United States, experiments here showed that workers significantly reduced their hours of work depending on the size of the grant and the tax rate. One would wonder how this Negative Income Tax system would be implemented. Basically the benefit (B) would be related to the basic grant (G), the tax rate (t) and the level of earnings/Income (E) by B = G – tE A basic monthly grant (G) would be introduced and the system

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