Question: The country of Akerlovia currently has a tax system that
The country of Akerlovia currently has a tax system that gives each citizen $5,000 in cash up front, exempts the first $10,000 in earned income from tax, and taxes all earned income over $10,000 at a 25% rate. It is considering replacing this system with an EITC system. The proposed new system would drop the $5,000 cash give-away and would instead subsidize the first $10,000 in earned income at a 50% rate. All income earned over $10,000 would still be taxed at the same 25% rate, and the EITC benefits would never be phased out. Describe the effects of this policy change on the labor supply of workers with various incomes.
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