The negative income tax has been proposed as a means of increasing both the efficiency and the equity of Canada's tax system (see Applying Economic Concepts 18-1 on page 465). The most basic NIT can be described by two variables: the guaranteed annual income and the marginal tax rate. Suppose the guaranteed annual income is $8000 and the marginal tax rate on every dollar earned is 35 percent. With this NIT, after-tax income is given by
After-tax income = 8000 + (1 - 0.35) X (Earned income)
a. On a scale diagram with after-tax income on the vertical axis and earned income on the horizontal axis, draw the NIT relationship between earned income and after-tax income.
b. What is the level of income at which taxes paid on earned income exactly equal the guaranteed annual income?
c. The average tax rate is equal to total net taxes paid divided by earned income. Provide an algebraic expression for the average tax rate.
d. On a scale diagram with earned income on the horizontal axis and tax rates on the vertical axis, plot the average and marginal tax rates for the NIT. Is the NIT progressive?