NIT Picking : The Macroeconomic Effects of a Negative Income Tax

In a general-equilibrium model, with individual heterogeneity and uninsurable idiosyncratic labor risk, I study a revenue-neutral reform of the U.S. income tax and welfare system that involves the adoption of a Negative Income Tax (NIT). I compare the NIT with a flat tax reform that keeps the actual welfare system. The optimal NIT has a 2.09% ex-ante average welfare gain and outperforms the flat tax reform by a considerable margin. However, it does not have sufficient political support; a "popular" NIT is considered instead. Different sensitivity analyses show the NIT is a viable tax reform