Suppose that a family’s tax liability equalled half its income minus $10 000. Under this system, some families would pay taxes to the government and some families would receive money from the government through a ‘negative income tax’.

a Consider families with pre-tax incomes of $0, $10 000, $20 000, $30 000 and $40 000. Draw up a table showing pre-tax income, taxes paid to the government or money received from the government, and after-tax income for each family.

b What is the marginal tax rate in this system? (See chapter 12 if you need to review the definition of marginal tax rate.) What is the maximum amount of income at which a family receives money from the government?

c Now suppose that the tax schedule is changed so that a family’s tax liability equals a quarter of its income minus $10 000. What is the marginal tax rate in this new system? What is the maximum amount of income at which a family receives money from the government?

d What is the main advantage of each of the tax schedules discussed here?