A negative income tax in a mini-welfare state: A simulation exercise with MIMIC

This paper traces the effects of a negative income tax on labor supply and economic growth by use of the applied general equilibrium model of the Central Planning Bureau of the Netherlands, named MIMIC. The simulation results show that replacing the social security system by an individualized negative income tax induces a large fall in labor supply, but the employment effect might be neutral. The main explanation is that the introduction of a negative income tax strongly reduces the replacement ratio and makes low-paid jobs much more attractive for workers. This generates wage moderation and leads to a large fall in unemployment. However, since the jobs created have a rather low labor productivity, production growth will be negative.