The blue line shows after-tax income with an NIT. It starts at the
guaranteed annual income of $10 000, rises by 60 cents for
every one dollar increase in earned income, and crosses the
line at the break-even level of income, $25 000. The vertical
distance between the two lines shows the net transfers
between the household and the government.
Note that the NIT is a progressive tax, despite the constant
marginal income-tax rate. To see this, note that a household’s
average tax rate is equal to the total taxes paid divided by total
earned income. If is earned income, then
The average tax rate for the household rises as earned income
rises, but the average tax rate is always less than the marginal
tax rate (40 percent). That the average tax rate rises with
earned income means that higher-income households pay a
45 °
IE
Average tax rate =
= (0.40)−(0.40)×IE− 10000
IE
10000
IE