Must a Negative Income Tax Reduce Labor Supply?: A Study of the Family's Allocation of Time

Abstract

Models of the labor supply behavior of single persons predict that a negative income tax (NIT) will always reduce the labor supply and earnings of such persons. I consider three models of family labor supply; and find that in all three, a NIT might raise a given family member's labor supply and might also raise total family labor supply: in one, a NIT could even raise total family earnings. These models and recent empirical estimates (showing positive NIT effects on some family members’ labor amply and on some families’ earnings) suggest that the work disincentive effects and the cost of a NIT may be less than has previously been thought.