There has been a renewed interest in raising the federal minimum wage in the US, with...

 

Transcribed Image Text:

There has been a renewed interest in raising the federal minimum wage in the US, with some members of Congress calling for an increase to $15 an hour. Some opponents to the minimum wage suggest that the Earned Income Tax Credit (EITC) is a better policy. This question explores the EITC. Low-wage workers receive additional income from the federal government depending on how much they earned and how many children they have. Consider an individual with one child: • there is no credit if nothing was earned. • the credit equalled $.34 per dollar earned and peaked at around $3050, when the worker earned $8950. it remained at $3050 until the worker earned around $16450 • it was phased out gradually, by $.16 per dollar earned, until eliminated completely if the worker earned $35525 or more per year. Graph the budget constraint for this individual assuming there are no other taxes, and they earn "W" dollars per hour. Q1 b (4 points) Analyze how the implementation of the EITC influences the hours of labour supplied. Assuming that substitution effects are larger than income effects for this low-wage worker, does the credit necessary increase hours work for all those who are eligible? Why or why not? Q1 c (4 points) How does the EITC impact an individual's labour force participation decision if the individual was not working in the absence of the EITC program? Q1 d (4 points) The Working Income Tax Benefit (WITB) is the Canadian equivalent to the EITC. It provides no credit until labour earnings reach a minimum of $3000. The benefit is then calculated on the basis of "earnings minus $3000". What would happen to the work incentives of the EITC is a similar $3000 threshold was introduced? There has been a renewed interest in raising the federal minimum wage in the US, with some members of Congress calling for an increase to $15 an hour. Some opponents to the minimum wage suggest that the Earned Income Tax Credit (EITC) is a better policy. This question explores the EITC. Low-wage workers receive additional income from the federal government depending on how much they earned and how many children they have. Consider an individual with one child: • there is no credit if nothing was earned. • the credit equalled $.34 per dollar earned and peaked at around $3050, when the worker earned $8950. it remained at $3050 until the worker earned around $16450 • it was phased out gradually, by $.16 per dollar earned, until eliminated completely if the worker earned $35525 or more per year. Graph the budget constraint for this individual assuming there are no other taxes, and they earn "W" dollars per hour. Q1 b (4 points) Analyze how the implementation of the EITC influences the hours of labour supplied. Assuming that substitution effects are larger than income effects for this low-wage worker, does the credit necessary increase hours work for all those who are eligible? Why or why not? Q1 c (4 points) How does the EITC impact an individual's labour force participation decision if the individual was not working in the absence of the EITC program? Q1 d (4 points) The Working Income Tax Benefit (WITB) is the Canadian equivalent to the EITC. It provides no credit until labour earnings reach a minimum of $3000. The benefit is then calculated on the basis of "earnings minus $3000". What would happen to the work incentives of the EITC is a similar $3000 threshold was introduced?

Answer rating: 100% (QA)

Q1 b 4 points Analyze how the implementation of the EITC influences the hours of labour supplied Assuming that substitution effects are larger than in... View the full answer