Question

11. Give a quantitative example on how Negative Income Taxes work?

Answer 1

Negative income tax is a welfare alternative suggested by various economist including Milton Friedman according to which the Income tax would be charged above a certain income base and below that income base individual will get the tax credit or negative income tax.

For example if for single independent individual base income is set at $30000 and if the income tax rate is 30% the simple NIT model would be like (I-30000)*0.3 now, suppose if individual income is $10000 then the income tax payable would be (10000-30000)*0.3=$-6,000 which is negative income tax which means instead individual is eligible for subsidy amounting to $6000 from Government