Consider a negative income tax in which an individual receives a cash benefit of B per month, and pays a marginal tax M on any income earned. If an individual’s income is Y, their combined income from earnings and benefit is then B+(1-M)Y.
a) If B = $1000 per month and M equals .3, at what level of earned income Y is the cash benefit equal to the taxes paid?
b) If B is increased to $1200 and M again equals .3, what is the increase in the earned income level Y at which the cash benefit equals the taxes paid?
c) If the poverty threshold for a family of four is $2000 per month, how would you set B and M?
d) What problems do you see in using a negative income tax to support low income families?