Assume the gross wage of w=$10 per hour and gross non-wage income YN = $5000 per year. Assume a maximum of 6,000 hours of leisure per year (T= 6000 per year ), so that full income for the worker is $65,000.

Draw the budget constraint under each of the following taxes and transfer schemes.

1. The federal Earned Income Tax Credit (EITC) program, which has the following features (approx.) for a family of 4. For annual earnings below $14,000, a person receives a wage subsidy of 40%. The maximum subsidy received is therefore $5,600. The subsidy remains constant at $5,600 until earnings reach $24,000. Then, the subsidy is gradually reduced at the rate of 20% per dollar of earnings until it becomes zero at an earnings level of $52,000. To simplify the diagram for the EITC, assume that the individual does not have any non-wage income (i.e., YN= 0)

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To draw the budget constraint under the EITC program we need to consider the different income levels ... View the full answer