# What follows is a slightly simplified version of the earned income tax credit (EITC)

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What follows is a slightly simplified version of the earned income tax credit (EITC) which has become the largest income transfer program in the U.S. You will be asked to draw budget constraints for an individual (with two children) with and without EITC.

• Consider an individual whose only sources of income are labor and EITC. The market wage rate for a person with this individual’s skills is \$8.00 per hour. The individual is not subject to any income or social security tax. The individual has 5,000 hours a year that could conceivably be spent on wage earning activities (approximately the hours of an investment banker). If this person’s annual wage income is less than \$9,700, he (she) receives a subsidy of 40% of wage income in the form of a tax credit from the federal government. If income is between \$9,700 and \$12,700, the subsidy is \$3880. For every dollar of wage income earned in excess of \$12,700, the tax credit is reduced by 20 cents.

• Carefully draw a diagram that depicts this individual’s budget constraint between leisure and after-tax annual income with and without the EITC. If there are several segments in the EITC budget line identify them as segment 1, segment 2, etc. It is better to use graph paper to do this, also draw a large graph.

• What is opportunity cost of leisure in the absence of EITC program? Explain what happen to the opportunity costs of leisure as you move along the different segments of the EITC budget line and compare the opportunity cost of leisure without the program to the opportunity costs of leisure with the program.

• How would the income and substitution effects be different on each segment of the EITC?

• Across some Scandinavian countries an experiment with a concept called Universal Basic Income is taking place. The next question relate to this issue

• Please do a search UBI and explain what it is.

• Using the budget line and indifference curve between income and leisure, Draw and explain what would happen to the budget line, be sure to discuss if there are changes in the slope or not. Draw the new utility maximization income-leisure combination

• Based on the changes discussed above, explain if there are substitution and income effects.

• Predict the effect of BUI on people’s utility and their income-leisure decisions.

• If you can find any evidence on the effects of the program please summarize it and cite the sources.

### GET A 40% DISCOUNT ON YOU FIRST ORDER

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# What follows is a slightly simplified version of the earned income tax credit (EITC)

### GET A 40% DISCOUNT ON YOU FIRST ORDER

What follows is a slightly simplified version of the earned income tax credit (EITC) which has become the largest income transfer program in the U.S. You will be asked to draw budget constraints for an individual (with two children) with and without EITC.

• Consider an individual whose only sources of income are labor and EITC. The market wage rate for a person with this individual’s skills is \$8.00 per hour. The individual is not subject to any income or social security tax. The individual has 5,000 hours a year that could conceivably be spent on wage earning activities (approximately the hours of an investment banker). If this person’s annual wage income is less than \$9,700, he (she) receives a subsidy of 40% of wage income in the form of a tax credit from the federal government. If income is between \$9,700 and \$12,700, the subsidy is \$3880. For every dollar of wage income earned in excess of \$12,700, the tax credit is reduced by 20 cents.

• Carefully draw a diagram that depicts this individual’s budget constraint between leisure and after-tax annual income with and without the EITC. If there are several segments in the EITC budget line identify them as segment 1, segment 2, etc. It is better to use graph paper to do this, also draw a large graph.

• What is opportunity cost of leisure in the absence of EITC program? Explain what happen to the opportunity costs of leisure as you move along the different segments of the EITC budget line and compare the opportunity cost of leisure without the program to the opportunity costs of leisure with the program.

• How would the income and substitution effects be different on each segment of the EITC?

• Across some Scandinavian countries an experiment with a concept called Universal Basic Income is taking place. The next question relate to this issue

• Please do a search UBI and explain what it is.

• Using the budget line and indifference curve between income and leisure, Draw and explain what would happen to the budget line, be sure to discuss if there are changes in the slope or not. Draw the new utility maximization income-leisure combination

• Based on the changes discussed above, explain if there are substitution and income effects.

• Predict the effect of BUI on people’s utility and their income-leisure decisions.

• If you can find any evidence on the effects of the program please summarize it and cite the sources.

### GET A 40% DISCOUNT ON YOU FIRST ORDER

Posted in Uncategorized