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 25¢ for each additional dollar earned until it becomes $0 at an income of $24,000. The only qualification required to receive this tax credit is an income below $24,000. The tax credit can be calculated using the following formula: Tax Credit = $6,000 - (Income x 25%) For example, a family earning an income of $8,000 will receive a credit of $6,000 ($8,000 x 0.25) = $4,000. The marginal tax rate of a family earning an income of $20,000 is Again, consider a family earning an income of $20,000. When a family member works more and earns an extra dollar, the family's tax credit is reduced by 254. Therefore, this family will only receive an additional 75¢ for that extra dollar earned. Compared to a situation in which there are no income taxes at all, the negative income tax system the incentive of the family members to work more and earn more income.

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 25¢ for each additional dollar earned until it becomes $0 at an income of $24,000. The only qualification required to receive this tax credit is an income below $24,000. The tax credit can be calculated using the following formula: Tax Credit = $6,000 - (Income x 25%) For example, a family earning an income of $8,000 will receive a credit of $6,000 ($8,000 x 0.25) = $4,000. The marginal tax rate of a family earning an income of $20,000 is Again, consider a family earning an income of $20,000. When a family member works more and earns an extra dollar, the family's tax credit is reduced by 254. Therefore, this family will only receive an additional 75¢ for that extra dollar earned. Compared to a situation in which there are no income taxes at all, the negative income tax system the incentive of the family members to work more and earn more income.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1) 0%

20%

25%

75%

2) never affects

reduces

increases

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Step 1: Introduce the Concept of Negative Income Tax

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Step 2: Understand the Tax Credit Formula

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Step 3: Calculate the Tax Credit for a Given Income

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Step 4: Determine the Marginal Tax Rate

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Step 5: Analyze the Incentive to Work More

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Step 6: Conclude with the Implications of the Negative Income Tax

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