Question: Suppose the government has to choose between two antipoverty programs. Each program guarantees that every family has at least $15,000 of income. One scheme establishes a negative income tax where:Taxes = (0.50 of income) - $15,000.The other scheme is for the government to guarantee every family at least $15,000 to spend, and if a family falls short, the government will simply make up the difference.
a. Using the negative income tax scheme described above, fill out the following table.
b. What is the value of income for which this family neither receives a subsidy nor pays any tax? (That is, how high does income have to be for the family to stop receiving a subsidy?)
c. Under the second scheme where the government simply guarantees at least $15.000 to every family, what is the level of income at which a family stops receiving a subsidy? Explain.
d. Which plan is likely to be more expensive to the government? Explain.
e. Suppose a poor family that only earns $5,000 per year decides to plant a garden and sell the produce in a "farmer's market" in the city. Suppose the family earns an additional $5,000 selling the produce. What is the family's final income under each scheme? What is the effective tax rate on the $5,000 earned by the family under each scheme? Which scheme promotes a work ethic among the poor and which one discourages work? Explain.