Negative income tax is the model of a state transfer service that covers the poverty line, aimed at citizens with no or low incomes. The amount of this transfer performance decreases depending on how much citizens earn. The model provides an alternative to basic needs such as unemployment benefit.
With a negative income tax system, individuals earning a particular income level would have no tax obligations. While those above that threshold would be liable for a proportion higher than that level; individuals beneath such threshold obtain a payment proportional to their shortfall.
The type of implementation of negative income is crucial for the cost of collecting them. The payments are related to both positive and negative tax on flat tax. Each tax payer receives the determined amount through the marginal tax rate on the allowance. The payment can be spread over one year on monthly installments.
On the other hand, any additional income is immediately taxed with the marginal tax rate. This means that income earners receive no positive taxed income tax on the allowance. A positive income is taxed at the same level as the exempt amount to an average tax rate of 0%, because this raises the withholding tax and the negative income tax to another level.
Higher positive taxable income leads to a progressively increasing average tax rate. Even top earners get the negative tax, however, they pay so many positive taxes, to the extent that the negative income tax decrease becomes insignificant. Because it approaches the marginal tax rate at very high incomes.
All things being equal, a negative income tax has a higher progressivity, where the average tax of the taxpayer must not be negative. Thus, ensuring that the average tax may be negative, and is expressed in the tax formula as an additional operation, consequently increasing the cost of tax collection.
A negative income tax is supposed to establish one mechanism that pays for government, and accomplishes the social objectives of ensuring the existence of a minimum level of income for everyone. Supporters of the tax consider it fair, since it relieves a tool for low income redistribution, because there is a redistribution from rich to poor.
The basic formula for calculating the tax in this case acts as a rocker that compensates for the diminishing marginal utility of income increases. It has a low perceived value than a larger one for top earners.
An assessment of taxation needs data. In quantitative terms, it is the same as using any type of tax formula, an appropriate assessment of a desired redistribution effect by comparing the Gini coefficient, Theil index, etc, to that of the income distribution before and after taxation. The transfer of potential savings in tax collection costs against revenue losses that occur by negative average taxes.