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Recipients of public assistance and unemployment benefits face an effective marginal tax rate of (almost) 100%, since these payments decline in a ratio of one by one when own income is earned. The metaphor of an “unemployment trap” describes this labour supply disincentive quite accurately. A negative income tax could overcome this problem, but is considered to be too expensive and to entail some flaws from an allocative point of view. Starting from this critique, we propose a “Targeted Negative Income Tax”, which basically confines the negative income tax to the group of the long-term unemployed. This targeting ensures that the incentives are given to those who need them most, and avoids the massive fiscal burden associated with a general introduction of a negative income tax. The fiscal burden may even be reduced with each long-term unemployed person who is drawn back into the labour market. In this paper, we compare this proposal to some alternative measures created to provide work incentives such as the “Family Credit” and the “Earned Income Tax Credit” introduced in the UK and the US, respectively.

Wege aus der Arbeitslosenfalle – ein Vergleich alternativer Lösungskonzepte