NIT improves household welfare and reduces inequality

[Gurgel is a research scientist at MIT and Wolf is a professor at Universidade Federal de Viçosa (UFV), “Welfare impacts of a negative income tax on regions of Brazil,” December 2021, (graph excluded) https://www.researchgate.net/profile/Leonardo-Cardoso-2/publication/357141243_Welfare_impacts_of_a_negative_income_tax_on_regions_of_Brazil/links/61d0eff5e669ee0f5c7db00a/Welfare-impacts-of-a-negative-income-tax-on-regions-of-Brazil.pdf accessed 7/18/23 NR]

The above suggests while social programs enhance the welfare of the Brazil’s poorest, their effects upon factor prices diminish the welfare benefits in the long run. It could be that an NIT could maintain the household welfare in the long run, while simultaneously reducing inequality and the relative size of government. Recall that NIT Scenario A eliminates existing social programs and conventional income tax, then sets an average tax rate of 25%, with the household income class 6 being tax-neutral; that is, in net, its households pay no federal taxes nor receive federal income supports. Scenario A results are shown in Table 8. The table shows the share of income paid as a tax or received as a social transfer before and after implementing the NIT. For example, in the North, the purchasing power of the income class 1 is 16.55% higher under Scenario A than currently exists. In all regions, the new policy’s welfare gain is much higher for class 1 households. Comparatively, in Brazil’s poorer regions (the North and Northeast), these households receive more than do equivalents in other regions. Currently, the poorest households receive a direct transfer from the government, regardless of their income. In Scenario A, they receive a portion of the income as a transfer that, in general, is larger than the value of the social programs they currently receive. That is, they would effectively gain welfare. The largest gains would be experienced by class 10 households in the Northeast (a 39.50% rise in welfare or US$ 10.147 billion). Meanwhile, the welfare of households of the same class in the South would rise by 12.82% or US$11.971 billion