4. Figure 29 uses euro’s and the new Dutch tax code and minimum wage of 2002. Using a 75% first bracket allows the minimum wage to shift from M1 to M2. The shaded area gives the tax revenue lost, which would be compensated by saved benefits.
Figure 29: Linear repair Holland 2002
We will discuss the optimal regime later, and return to the issue of raising exemption. This paragraph here was useful to clarify some terminological confusions. It also indicates that marginal rates will feature strongly in the discussion about the repair. A marginal rate of 100% or the marginal rates associated with negative curvature seem prohibitive for practical implementation. At least, in the conventional wisdom.
A note on the negative income tax
A common topic in the subject of taxation is the concept of a negative income tax (NIT). A person below a certain threshold receives money instead of paying it. The negative income tax can be presented as a ‘basic benefit’: all members of society receive allowance A from the state, and pay taxes only on their additional income. The negative income tax or basic benefit is often presented as a solution to the current unemployment problem. The Central Planning Bureau (1992a&b) in fact shows that this can work.
It is useful to clarify the following. We can distinguish three groups with different effects:
· for the currently employed the NIT has no effect, since they already are employed and in fact already earn their own basic benefit
· for the people in the Tax Void, the NIT effectively only means the increase of exemption, and thus one might as well increase exemption