The negative income tax Many economists believe that a more effective way to sup

Question

The negative income tax 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.

Explanation / Answer

As we can observe from the above table that any income less than 40,000 holds  negative tax liability which signifies subsidy, thus it is true that any income less than 40,000 will receive subsidy.

Income Tax Liability = 1/4 of income - 10,000 0 -10000 (Subsidy) 20000 -5000 (Subsidy) 40000 0 (neither tax nor subsidy) 60000 5000 (Tax)

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