=+8.6 Policy Application: The Negative Income Tax: Suppose the current tax system is such that the government takes some fixed percentage t of any labor income that you make.

A. Some in Congress have proposed the following alternative type of tax system known as the negative income tax: You get a certain guaranteed income x even if you do not work at all. Then, for any income you earn in the labor market, the government takes a certain percentage k in taxes. To finance the guaranteed income x, the tax rate on labor income in this alternative system has to be higher than the tax rate under the current system (i.e., t , k).6

a. On a graph with leisure on the horizontal axis and consumption on the vertical, illustrate what your budget constraint under the current tax system looks like, and indicate what the intercepts and slopes are assuming a leisure endowment of E and before-tax wage w.

b. On a similar graph, illustrate what your budget constraint looks like under the alternative system.

c. You hear me say: “You know what? After looking at the details of the tax proposal, I can honestly say I don’t care whether we keep the current system or switch to the proposed one.”

Without knowing what kind of goods leisure and consumption are for me, can you tell whether I would work more or less under the negative income tax? Explain.

d. What would your tastes have to look like in order for you to be equally happy under the two systems while also working exactly the same number of hours in each case?