Question

The negative income tax (NIT) is a plan under which families a. above a level of income pay no tax. b. pay the same tax rate except for the poor. c. below a level of income receive pay no tax. d. below a level of income receive a cash payment.

Short answer

The correct answer is: The negative income tax (NIT) is a plan under which families below a level of income receive a cash payment (Option D).

Step-by-step solution

Understanding Negative Income Tax (NIT)

Negative Income Tax (NIT) is a progressive income tax system where people earning below a certain level receive supplemental pay from the government instead of paying taxes to the government. In other words, it provides a basic income guarantee to those who are in need, reducing poverty and inequality. Now, let's analyze each option given in the exercise:

Option A: No tax above a level of income

This statement says that families above a certain level of income pay no tax. This is not the case with NIT, as people with higher incomes are taxed at a higher rate. Therefore, Option A is incorrect.

Option B: Same tax rate except for the poor

According to this statement, families pay the same tax rate except for the poor. This is not true in the case of NIT, as it is a progressive tax system, meaning that those with higher incomes are taxed at a higher rate. So, Option B is incorrect.

Option C: No tax below a level of income

This option states that families below a certain level of income do not pay any tax. While it is true that NIT provides support to low-income families, it does this by supplementing their income, not by exempting them from paying taxes. Therefore, Option C is also incorrect.

Option D: Cash payment below a level of income

This statement suggests that families below a certain level of income receive a cash payment. This matches the concept of NIT, where low-income families get supplemental income from the government to help them meet their basic needs. Thus, Option D is correct. To sum up, the correct answer for the given exercise is: The negative income tax (NIT) is a plan under which families: d. below a level of income receive a cash payment.

Key concepts

Progressive Income Tax

A progressive income tax is a system in which the tax rate increases as the taxable amount of income increases. This means that individuals and families with higher incomes contribute a larger percentage of their income to public revenues than those with lower incomes.

The idea behind this system is to ensure a fair contribution based on the payee's ability to pay. It is designed to mitigate economic disparities by imposing less tax burden on lower-income earners, which in turn can help to uplift their financial situation. Progressive taxation is a crucial element of the Negative Income Tax (NIT), which is specifically tailored to support those earning below a certain threshold, rather than taxing them further.

Basic Income Guarantee

The concept of a basic income guarantee refers to a system where the government ensures that every citizen receives a minimum level of income, irrespective of their employment status.

This ensures a safety net against extreme poverty, providing individuals with the confidence to meet basic living requirements without the fear of destitution. The Negative Income Tax (NIT) embodies this principle by offering a direct cash payment to those earning below a certain level, hence ensuring a guaranteed minimum income.

Poverty Reduction

Poverty reduction is an essential objective of social policies, including the implementation of tax systems like the Negative Income Tax (NIT). By providing supplementary income to those in need, NIT aims to lessen the hardship faced by low-income families and individuals, helping to elevate their standard of living.

Through this form of financial assistance, the government can aid in reducing the poverty rate, enabling greater access to resources and opportunities for those who otherwise may struggle to sustain a minimal standard of living.

Economic Inequality

Economic inequality refers to the disparity in wealth and income among individuals and groups within a society. A high level of inequality can indicate a concentration of wealth in the hands of a few, while the majority remains with little.

The Negative Income Tax (NIT) aims to combat this inequality by redistributing resources, facilitating a more equitable spread of income, especially by providing support to those at the lower end of the economic spectrum. This can contribute to a healthier economy and a more just society where the gap between the rich and the poor is narrowed.