Economists have devoted considerable attention to the analysis of the advantages and disadvantages of the negative income tax (NIT) as a mechanism for income redistribution. Surprisingly little attention has been given to any significantly different alternative to the NIT most analyses simply compare one variant of the NIT to another. But recently several writers have suggested that a form of wage subsidy offers significant advantages over the NIT.1 This paper is an attempt to provide a more complete comparision of these two forms of transfer programs with an emphasis on the aggregate labor market consequences. Needless to say, no attempt is made to consider all repercussions of these policies. Instead, emphasis is focused on labor supply effects and related conditions for economic efficiency. Section I is an analysis of the effects of implementing a NIT when no other transfer programs are present. Section II is a similar analysis for a form of wage subsidy which will be referred to as the negative wage tax, or NWT. Section III uses the analysis of the preceding sections to provide a comparison of the NIT and NWT on two counts: their incidence and welfare cost.

[This paper develops a rigorous partial-equilibrium analysis of the determinants of the marginal welfare cost (MWC) of taxes on labor earnings. It shows that four key parameters interact to determine the magnitude of MWC. Using aggregate data and plausible ranges of values for the parameters, MWC can vary from under 10 percent to more than 300 percent of marginal tax revenue, suggesting that, given available evidence, we cannot estimate MWC with much precision.]

In his recent study (1985), Joseph Pechman presents estimates of incidence by income classes for several recent years. This study basically updates the earlier work by Pechman and Benjamin Okner (1974), which developed estimates for 1966, using the same methodology but applying it to more recent data to generate estimates of burdens by income class for 1970, 1975, 1980, and 1985. This note points out some peculiarities in the underlying data which suggest there are serious problems with the estimates for the later years. Pechman's major results are displayed in Table 1. Panel A of the table gives average rates for each major by household income deciles in 1966, and panel B presents the estimates for 1980, both for incidence variant ic.' (Ignore the last column in panel B for the moment.) As can be seen, the combined rate for the top decile is estimated to fall between 1966 and 1980 while it rises for the lowest decile. ratio of the rate for the top decile to the rate for the bottom decile declines from 1.8 in 1966 to 1.3 in 1980, a significant decrease in progressivity. Pechman explains the diminished progressivity by noting that the relative importance of various taxes has changed since 1966: The system became less progressive... primarily because the corporation income and the property declined in importance while more emphasis was placed on the payroll tax (p. 10). Although it is true that there has been a change in the relative contribution of various taxes since 1966, this change does not account for the decline in progressivity shown by the 1980 estimates. This is easily demonstrated by scaling up or down each decile's 1966 rate due to each in proportion to the change in the overall rate for that between 1966 and 1980. (For example, since property taxes had fallen from 3.0 percent of total income in 1966 to 2.0 percent in 1980, we would take two-thirds of the 1966 rates, i.e., 1.4 percent for the lowest decile, as an estimate of the 1980 rate due to the diminished importance of the property tax.) last column of panel B shows the results of these calculations, summed over all taxes. These figures suggest that if the only change since 1966 had been due to the change in the relative importance of various taxes, the system in 1980 would have been about as progressive as it was in 1966. Careful inspection of Table 1 clearly indicates that something else besides a change in the relative importance of taxes was responsible for the difference in results between 1966 and 1980. Note in particular the change for payroll taxes (principally the Social Security tax). In 1966, the payroll rate was 2.6 percent for the lowest decile, but in 1980 it is shown as having risen to 8.8 percent, an increase of 223 percent even though payroll taxes as a percent of total income rose by a scant 32 percent over this period. Even more puzzling is how the rate structure of the payroll taxes changed. In 1966, payroll taxes are shown as progressive up through the fifth decile and regressive at higher deciles, but in 1980 they are shown as regressive throughout the entire income distribution. At this point it will be helpful to explain why other studies (as well as Pechman's 1966 estimates) have found payroll taxes to be progressive at the bottom of the income distribution and regressive at the top.2 *Department of Economics, Texas A&M University, College Station, TX 77843. 'Eight different sets of incidence assumptions were used in the Pechman study. Variant Ic tends to embody competitive assumptions regarding the response of the economy to taxes. 2See, for example, my study with William Johnson (1979) or Richard Musgrave, Karl Case, and Herman Leonard (1974).

Applied tax incidence studies have concluded that the burden of the entire tax system is approximately proportional to income, a conclusion that depends critically on the assumption that sales and excise taxes are regressive. This paper shows that sales and excise taxes are progressive elements in the tax system when analyzed in a general-equilibrium model where government transfers are an important source of income. Consequently, the entire tax system is highly progressive under competitive assumptions about tax incidence. Moreover, the degree of progressivity is virtually unaffected when noncompetitive assumptions about tax incidence are employed.

Applied tax incidence studies have concluded that the burden of the entire tax system is approximately proportional to income, a conclusion that depends critically on the assumption that sales and excise taxes are regressive. This paper shows that sales and excise taxes are progressive elements in the tax system when analyzed in a general-equilibrium model where government transfers are an important source of income. Consequently, the entire tax system is highly progressive under competitive assumptions about tax incidence. Moreover, the degree of progressivity is virtually unaffected when noncompetitive assumptions about tax incidence are employed.