Which combines the effects of an income-support plan

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Assignment:

Problem

Your advice is sought on evaluating two policy proposals, each of which combines the effects of an income-support plan with an income-tax program. Let x denote earned income before any taxes or government transfers and let y denote income after taking all taxes and government transfers into account. Plan A An individual who earns no income (x = 0) receives a tax-free government support of $6,000 annually. No income support is received by anyone with positive earned income (x > 0). Those individuals who earn income in excess of $6,000 are required to pay income tax at the rate of 20% on each dollar earned in excess of $6,000. Plan B Everyone receives a basic income of $6,000 from the government. Each person then pays income tax at the rate of 40% for every dollar of earned income (that is, not including the basic income of $6,000).

(a) Compute income after taxes and transfers 3/ as a function of earned income x for each of the two plans, and graph both functions on the same diagram.

(b) Which tax 5 stem is more favorable from the tax a er's oint of view? How does Y P Y P your answer depend on the individual's level of earned income?

Reference no: EM133231772

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