. Consider a negative income tax in which an individual receives a cash benefit
ID: 1203384 • Letter: #
Question
. Consider a negative income tax in which an individual receives a cash benefit of B per month, and pays a marginal tax M on any income earned. If an individual’s income is Y, their combined income from earnings and benefit is then B+(1-M)Y up to the income level where benefits are no longer received.
a. If B = $1000 per month and M equals .3, at what level of earned income Y is the cash benefit equal to the taxes paid?
b. If B is increased to $1200 and M again equals .3, what is the increase in the earned income level Y at which the cash benefit equals the taxes paid?
c. If the poverty threshold for a family of four is $2000 per month, how would you set B and M?
d. What problems do you see in using a negative income tax to support low income families?
Explanation / Answer
a) combined income = B+(1-M)*Y
Cash benefit B= taxes paid MY
MY=1000
Y=1000/3=$333.33
b) B=1200
Y=1200/3=$400
Increase in Y=400-333.33=$66.67
c) when povery threshold Y (pretax income)=2000,
B=MY
B=M *2000
B/M=2000
It poverty threshold Y= 2000, B/M=2000 for earned benefits to equal tax.
d) i) Negative income tax may resut in a lack of effort of individuals to work harder and increase their earned income since they are receiving benefits without putting any effort at all.For higher income on the contrary they have to pay higher income tax.
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