Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Chapter 28, Problem 6CQ
To determine
Impact of income transfer on income.
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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.
How do factor endowments affect personal income? Examine different provisions employed by the government in dealing with inequality in the distribution of income.
What makes the Earned Income Tax Credit (EITC) different from other poverty-fighting programs?
The amount of the credit is doubled if the head of household is attending college.
The tax credit is phased out gradually, rather than at a specific income cutoff point.
The amount of the credit is not determined by the number of dependent children in the household.
The EITC doesn't require the recipient to pay a minimum amount of income tax in order to receive the credit.
It creates less of an incentive to work than other programs.
Chapter 28 Solutions
Economics: Private and Public Choice
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- Which of the following provides the best explanation for how consumer credit can exacerbate inequality? People with lower wealth and incomes must sacrifice more capacity and capital in order to acquire credit. People with lower wealth and incomes purchase less, so since credit allows all people to make purchases sooner, credit provides less benefit to these people. People with lower wealth and incomes may have less access to credit and pay higher interest rates when they are approved. People with lower wealth and incomes are offered credit with less collateral.arrow_forwardIn social welfare programs, there is no way to change either the benefit reduction rate or the benefit guarantee to simultaneously achieve all three goals of encouraging work, redistributing more income and lowering costs. What is this dilemma called?arrow_forwardWhat do you think about the income trap - is it a myth or reality? How does the middle-income trap affect the equality and poverty of citizens? What can be done to avoid or escape from the trap? Answer correctly and explain within 40 mins will give you positive feedback.arrow_forward
- Suppose the government implements a negative income tax plan to deal with the poverty problem. The negative income tax rate is set at 30%, and the break-even level of income is set at $20,000. 1. What is the guaranteed annual income level assured each family,. regardless of the amount of income earned by the family? 2. If a family earns $10,000 income, what will their negative income tax subsidy be? 3. If a family earns $30,000 income, what is their disposable income?arrow_forwardPoverty is measured by the number of people who fall below a certain level of income—called the poverty line—that defines the income one needs for a basic standard of living. The official definition of the poverty line traces back to Group of answer choices A)The Great Depression B)Mollie Orshansky, whose idea was to define a poverty line based on the cost of a healthy diet. C)1953 and the ability to pay for housing and food. D)The 1965 cost of providing food, housing, and transportation.arrow_forwardWhat is the main goal of redistribution policies in welfare economics? A. To increase government revenue B. To reduce income inequality C. To maximize consumer surplus D. To minimize deadweight lossarrow_forward
- Shen, who is currently unemployed, is a participant in four welfare programs that offer daily benefits of $10 each to people with no earned income. Each program then curtails its benefits by 50 cents for every dollar of income a recipient earns. Shen's identical twin brother, Sean, is enrolled in an experimental negative income tax program that gives him $40/day in benefits and then taxes him at the rate of 50 percent on each dollar of earned income. Now suppose Shen is offered a job that pays $4/hr, the same wage his brother earns. a. Draw the budget constraint for each twin. Instructions: To earn full credit for this graph you must plot all required points for each curve. 1. Use the line tool (Shen's budget constraint, plot 3 points) to draw the Shen's budget constraint. 2. Use the line tool (Sean's budget constraint, plot 2 points) to draw the Sean's budget constraint. After tax-income ($/day) 98 84 70 56 42 28 14 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Leisure (hrs/day) Tools Shen's…arrow_forwardplease label the two questions with the correct answers thank youarrow_forwardWhat is microeconomics How does inflation help in the redistribution of income? A) Disproportional change in prices B) Proportional changes in prices C) Falling prices D) Rising pricesarrow_forward
- Explain the trade-off between equity and efficiency in poverty-reduction policy.arrow_forwardOne of the major problems in dealing with any welfare program is the tension between individual and social responsibility- Medicare is no different. Should adult children be responsible for the medical expenses of their parents? No. Where does individual and familiar Responsibility end and social responsibility begin?arrow_forwardImagine someone living close to the poverty line in a developing country. This person runs a small business filtering and selling water. Her daughter gets sick, and she has to sell her filtering machine to pay for treatment. Now she makes very little money cleaning fish for a local fishing cooperative. Graph her income today versus her income tomorrow before her daughter got sick. Explain your assumptions with labels on the graph. Then graph what happens to the equilibrium after her daughter gets sick. Hint: this is an example of a trap.arrow_forward
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