Problem Set
1. Suppose that the government introduces an Earned Income Tax Credit such that for the first $8,000 in earnings, the government pays 50 cents per dollar on wages earned. For the next $3,000 of earnings, the credit is held constant at $4,000, and after that point the credit is reduced at a rate of 20 cents per dollar earned. When the credit reaches zero, there is no additional EITC.

a. Draw the budget constraint that reflects this tax credit for a worker who can work up to 4,000 hours per year at an hourly wage of $10 per hour. Assume the worker has no other source of income and faces no other taxes.

b. Illustrate on your graph the portions of the budget constraint where the labor supply effects of the policy are positive, negative, or ambiguous, relative to the "no policy" status quo.

2. The National Bureau of Economic Research (NBER) has a tax calculator called TAXSIM that allows you to calculate tax liabilities for a given individual in a given year. You are going to calculate marginal tax rates for a single parent with 2 children under the age of 17 for four years
(1984, 1994, 2004, and 2014) and at two real income levels ($20,000 in 2014 dollars and $100,000 in 2014 dollars):

a. Go to this website and calculate liabilities for one taxpayer under the following assumptions: tax year is 2014 (field 2); marital status is 3 for head of household (field 4); dependent exemptions is 2 (field 5); number of dependents under age 17 is 2 (field 19); and wage and salary income of taxpayer is $20,000 (field 7). Leave all other boxes at the default values. Hit the button "calculate this single taxpayer," and line #7 of the output give the federal marginal tax rate for that individual. What is that marginal tax rate?

b. Now, I want you to find out what has happened to marginal tax rates for someone in a similar economic position in past years. To do so, you will repeat this process in #a holding real earnings constant, but the calculations will be for 2004, 1994, and 1984, respectively. TAXSIM uses nominal earnings as the input to field 7. So, you will need to find out how much $20,000 in 2014 dollars was in 2004 to get the right nominal earnings for the 2004 calculation.
1. What was the nominal earnings you used for 2004?
2. What was the marginal tax rate in 2004?
3. What was the nominal earnings you used for 1994?
4. What was the marginal tax rate in 1994?
5. What was the nominal earnings you used for 1984?
6. What was the marginal tax rate in 1984?

c. Based on your calculations in #a and #b, what has happened to marginal tax rates over the last 30 years for a single parent with two children and real earnings of $20,000?

d. How do you think the pattern you found in #c has affected the labor supply of low-income single parents? Briefly explain your reasoning.

e. Repeat the calculations in #a and #b for the same single parent with 2 children, but with $100,000 in real earnings (in 2014 dollars).
1. What has happened to marginal tax rates over the last 30 years for a single parent in this economic position?
2. How do you think the pattern you found in #el has affected the labor supply of this group of single parents? Briefly explain your reasoning.

Problem Set 1. Suppose that the government introduces an Earned In...