Many economists believe that a more effective way to supplement the income of th

Question

Many economists believe that a more effective way to supplement the income of the poor is through a negative income tax. Under this scheme, everyone reports his or her income to the government; individuals and families earning a higher income will pay a tax based on that income, while low-income individuals and families receive a subsidy, or negative tax. Assume that the only qualification required to receive a tax credit is low income. Suppose the government uses the following equation to compute a family's tax liability: For each of the incomes listed in the following table, determine the tax liability for a family with that income level. (Note: If a family receives a subsidy because its income is too low, be sure to indicate the tax liability as negative.)True or False: The maximum subsidy a family can receive is $3,000. True false

Explanation / Answer

(1)

When income = 0, Tax = (0 / 2) - 6000 = - 6000

When income = 6000, Tax = (6000 / 2) - 6000 = 3000 - 6000 = - 3000

When income = 12000, Tax = (12000 / 2) - 6000 = 6000 - 6000 = 0

When income = 30000, Tax = (30000 / 2) - 6000 = 15000 - 6000 = 9000

(2) False

Subsidy = - Tax liability = 6000 - (Income / 2)

Subsidy is maximum when income = 0

Maximum subsidy = 6000 - (0 / 2) = 6000

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