Suppose that a negative income tax was created that set a minimum income for a family of $5,000 per year and had a marginal tax rate of 33 percent. What is the break-even level of income? If a person earned $5,000, what would the after-tax income level be? If the earnings were $10,000, what would the after-tax income be?
What will be an ideal response?
The break-even level of income is $15,000. At that income, the tax is $5,000 (exactly equal to the guarantee), and the payment by government to the family ceases. If the family earned $5,000, one-third of $5,000 would be deducted from the guarantee, and the family would have an income of $8,333.33. If the family earned $10,000, one-third of $10,000 would be deducted from the guarantee, and the family would have an income of $11,666.67.
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