Consider an income support program (similar to AFDC after 1967) in which a famil
ID: 1202915 • Letter: C
Question
Consider an income support program (similar to AFDC after 1967) in which a family with no income would receive $1500 in cash benefits per month, and if the family receives income from working Y, its benefits are reduced by two-thirds Y until income reaches a level such that benefits are eliminated.
A) At what income Y would benefits be eliminated? (That is, at what income Y would benefits be reduced to zero?)
B) Assume the poverty threshold for a family of four is $1000 per month. Would this income support program provide cash benefits with income above the poverty threshold level?
C) Suppose a family is receiving $500 cash benefits per month. If the head of household earns $300 more per month, how much will the family income (earned income plus cash benefits) go up? What is the effective marginal tax rate? (That is what proportion of a marginal dollar earned is lost to the government?)
Explanation / Answer
A family with no income would receive $1500 in cash benefits per month.
answer a) in order to eliminate benefits to zero,head must earn 2250$
1500-2/3Y=0
1500=2/3Y
Y=1500*3/2
=2250 $
answer b) yes it would as the limit is 1500$
answer c)cash benefits=500$
that means his income=1500-2/3Y=500
1000=2/3Y
Y=1500$
new income=1500+300$
=1800$
thus new income(total)= 1800+(1500-2/3*1800)
=1800+300
=2100$
earlier it was=1500+500$
=2000$
thus an increase of 100$
the marginal tax rate is the percentage taken from next dollar of taxable income above a pre-defined income threshold. it will depend upon tax bracket