Question

Suppose that the Negative Income Tax has been changed as follows. The breakeven income remains the same, but the income guarantee has been reduced by half. Does the disposable income of the recipient increase or decrease? Justify your answer.

Answer 1

Negitive income tax is for the person whose income generation is below poverty line. Lets suppose the poverty line is $3000 and the person is earning less than $3000 ( suppose $2000) he will get 50% of the amount which is the difference between the poverty line and the real income i.e. ( 3000-2000 ÷2 = $500 ).

Now if we reduce the guranteed income (which is 50% of the difference) by half. Than the person below poverty line will get half of the amount he was receiving ( as in above example he will get 500 ÷ 2 = $250 ). Hence this will decrease the disposable income of the recipient.

answered by: anonymous