4. The negative income tax Aa B A negative income tax system provides low-income

Question

4. The negative income tax Aa B A negative income tax system provides low-income families with a subsidy (a negative tax). Consider a negative income tax system in which families earning zero income receive a tax credit of $6,000, and the credit is reduced by $0.40 for each additional dollar earned until it becomes $0 at an income of $15,000. The only qualification required to receive this tax credit is an income below $15,000. Calculate the tax credit by using the following formula: Tax Credit = $6,000-(Income x 0.40) For example, a family earning an income of 8,000 will receive a credit of $6,000 A family earning an income of $12,000 will receive a credit of ($8,000 x 0.40) $2,800. The marginal tax rate of a family earning an income of $12,000 is

Explanation / Answer

Tax credit = $6000-(12000*.40) = 6000- 4800 = $1200

Marginal tax rate = d(tax credit)/d(income).

Differntiate tax credit wrt income will give us the marginal tax rate.

=0.4

or 40%

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