Effects of given policy change on labor supply of workers

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Reference no: EM131200225

The country of Akerlovia currently has a tax system that gives each citizen $5,000 in cash up front, exempts the first $10,000 in earned income from tax, and taxes all earned income over $10,000 at a 25% rate.

It is considering replacing this system with an EITC system. The proposed new system would drop the $5,000 cash giveaway and instead would subsidize the first $10,000 in earned income at a 50% rate.

All income earned over $10,000 still would be taxed at the same 25% rate, and the EITC benefits never would be phased out.3

Describe the effects of this policy change on the labor supply of workers with various incomes.

Reference no: EM131200225

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