Reference no: EM132181637

The negative income tax

Many economists believe that a more effective way to supplement the income of the poor than current programs 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.

Suppose the government uses the following equation to compute a family's tax liability:

Taxes Owed =  (1/3 of Income)-$9,000

For each of the incomes listed in the following table, determine the tax liability for a family with that income level. (Note: If a family receives a subsidy because its income is too low, be sure to indicate the tax liability as negative.)

Income (Dollars) Tax Liability(Dollars)

0

13,500

27,000

60,000

True or False: If a family is currently receiving a tax credit, the credit is reduced by $0.25 for each additional dollar earned until the family reaches an income of $27,000 and the credit becomes $0.