- 25 Mar, 2021
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Taxation theory
Please look up the page for the Earned Income Tax Credit on the IRS website. Pay particular
attention to the page on the Earned Income and AGI Limits. Make sure you’re looking at the
information for the 2019 income year. You might also find it useful to consult other websites.
(a) Take a two-parent family, married and filing jointly, with two children, and an earned
income and adjusted gross income of $50,000. Would they qualify for the EITC?
Yes because the phase-out ends at $52,493 for this family type.
(b) Take a family with a single parent who has three children, and has an earned income
and adjusted gross income of $40,000. What value of EITC does this family qualify for?
$6, 557 − 0.2106 ∗ ($40, 000 − $19, 030) = $2140
(c) Take a single individual with no children who has an earned income and adjusted gross
income of $12,000. What value of EITC does this individual qualify for?
$529 − 0.0765 ∗ ($12, 000 − $8, 650) = $273.
(d) Recall the EITC phase-in, plateau, and phase-out regions. And remember very carefully the definitions of progressive, flat, and regressive tax schedules that we discussed in
1
class. Considering only the EITC and ignoring all other taxes, is the tax schedule progressive, flat, or regressive throughout the EITC phase-in region? What about the EITC plateau
region? The phase-out region? (This is tricky because the EITC is a subsidy. We call a tax
system ”progressive” because it taxes the rich proportionally more than the poor. Think
about whether a progressive tax system would give the rich or the poor proportionally a
greater subsidy.)
The EITC is flat throughout the phase-in region (because the average subsidy rate is constant), then it is progressive throughout the plateau and phase-out regions (because the
average subsidy rate is falling throughout the plateau region and then falling even faster
throughout the phase-out region).
Question 2 (30 points)
Consider the following figure depicting the leisure-consumption tradeoff of a worker. Consumption is annual measured in dollars, and leisure is annual measured in hours. Labor
earnings are this worker’s only source of income. Suppose there is an increase in the laborincome tax rate from 20% to 30%,