Using Rohit's variables:
1. F: The government provided a fixed payment to every individual.
2. I: Income earned other then the fixed government payment.
3. R: A flat tax rate of positive income tax.
To make it simple let R be a decimal number i.e. for 50% rate it is 0.5, for 25% it is 0.25.4. E: Total take home earning of an Individual
E= I – R*I + F
If Income (I) = 40, then with Rohit's formula then Earning is 40 - 0.5*40 + 60 = 80.
Let's understand what the formula means. We know for Income less than 60.
Earning = Income + Government Support
Government support is reduced by certain rate (1/2 on our example) for every dollar in inccome.
i.e. Government Support = F - R*I
Therefore, E = I + F - R*I <----- the formula Rohit uses. Or is R = 1/2 then E = F + 0.5I Let's say if the government only "reimburses" upto the amount that a person falls short of $60. Howeverm if Income is greater than 60 then E=I. To represent it in simple code:
IF I > F
E = IELSE
E = I + F - R*IENDIF
for F = 60, I = 60, R = 0.5; E = 90
We can clearly see that if a person gets $60 then there is a strong dis-incentive for him to get a higher paying job unless the job pays more than $90 (50% increase in pay, which might be very difficult to get). This is a major point of attack for NIT opponents