A few days ago, I was speaking with a young woman who has recently gone on student welfare in Ontario. She is an older teen, trying to finish high school, no longer living with her parents, and struggling to make ends meet. She has a part-time job, but it doesn't pay enough for her to cover her rent and living expenses, and so she went on welfare to help her out while she finishes school.
She told me that for the next four months, the welfare plan she is on will deduct 100% of what she earns during one month from her welfare cheque the following month. That's right, for the next four months, she faces a 100% marginal tax rate. It is no surprise that this scheme has affected her willingness to work; she doesn't care if she doesn't get many hours on her part-time job.
And that is the essence of economists' arguments in favour of the negative income tax, whereby the amount of welfare would decline by only a percentage of the recipient's earnings. But in the case of student welfare, the incentive effects might be to induce her to do more studying and less for-pay work.
After four months, she will be on a negative income tax plan: Her welfare payments will decline by only a portion of her previous month's earnings. And she will have a much stronger incentive to work extra shifts each week.
Update: After I wrote the above material, I learned that she plans to quit her part-time job so long as student welfare deducts all she earns from her welfare cheque. Her response is certainly understandable.