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  3. 2. suppose that there are three types of programs

2. Suppose that there are three types of programs and taxes that apply to individuals...

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2. Suppose that there are three types of programs and taxes that apply to individuals with relatively low earnings: 1. A transfer of $1000 to those with earnings below $4000 that is (linearly) eliminated between earnings of $4000 and $9000 so that people with earnings above $9000 receive nothing. 2. A program that is supposed to encourage work. It consists of a subsidy to work that is equal to zero for those with no earnings and then linearly increases to reach $3000 for those with earnings equal to $6000. Individuals with earnings between $6000 and $8000 continue to receive a transfer of $3000 which is then (linearly) eliminated between earnings of $8000 and $18000. 3. Earnings greater than $10000 are subject to a 30% income tax. (a) What is the marginal tax rate combining the effect of all three programs applying at each of the following earning levels: $2000,$5000,$7000,$8500,$9500,$15000 and $20000? (b) What do you think is the overall effect of this system on work participation (i.e. the decision whether to work

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