What is the effective marginal tax rate

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Reference no: EM131102435

Consider an income support program (similar to AFDC after 1967) in which a family with no income would receive $1500 in cash benefits per month, and if the family receives income from working Y, its benefits are reduced by two-thirds Y until income reaches a level such that benefits are eliminated.

a. At what income Y would benefits be eliminated? (That is, at what income Y would benefits be reduced to zero?)

b. Assume the poverty threshold for a family of four is $1500 per month. Would this income support program provide cash benefits with income above the poverty threshold level?

c. Suppose a family is receiving $500 cash benefits per month. If the head of household earns $300 more per month, how much will the family income (earned income plus cash benefits) go up? What is the effective marginal tax rate? (That is what proportion of a marginal dollar earned is lost to the government?)

Reference no: EM131102435

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