Final answer:
The best description of a negative income tax is one where low-income households receive a government payment instead of paying taxes, typically seen in programs like the earned income tax credit.
Step-by-step explanation:
Negative Income Tax Explained
A negative income tax is designed to provide income support for those who earn below a certain threshold by effectively paying them a form of tax rebate. The correct description of a negative income tax between the options provided is: households where the combined income is below a certain level, such as $25,000, would receive a payment from the government, rather than paying taxes. This system is intended to assist the working poor and can be seen in programs such as the earned income tax credit (EITC).
The federal income tax system is progressive, meaning as an individual's income increases, he or she pays a higher rate of taxes both in absolute terms and as a percentage of income. Yet, the bottom two quintiles, largely due to the EITC and similar provisions, may experience negative effective income taxes — receiving more from the government than they pay in.
Despite occasional news reports of high-income individuals paying little in taxes, the Congressional Budget Office maintains that, on average, those with higher incomes pay a larger share of their income in federal income taxes.
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