Negative income tax to support low income families

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Reference no: EM131102784

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?

Reference no: EM131102784

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