Back to Assignment Attempts 08 Keep the Highest 0.8/4 4. Redistributive philosophies and incentives Consider a society consisting of two people. Kevin earns an income of $115,000 per year and Maria earns an income of $40,000 per year. The government is considering a redistribution plan that would impose a 15% tax on Kevin's income and give the revenue to Maria without any incentive distortion, Kevin would retain $97,750 and Maria would end up with $57,250. However, let us assume that since Kevin will not receive all the income he earns, he decides to work less and earn an income of only $95,000, of which 15% x $95,000-$14,250 will be owed in taxes. With the redistribution plan, Kevin will take home an income of s The $14,250 that Kevin pays in taxes will be transferred by the government to Maria. Let us assume that since Maria now receives payment from the government, she will not work as many hours and will earn an income from work of only $35,000 instead of her initial $40,000. With the redistribution plan, Maria's total income (including the government payment received) is now s Without a redistribution plan, total income in this society is 1 Therefore, the redistribution plan According to the maximin criterion, the government After the redistribution plan is implemented, total income in this society is total income in this society. implement this redistribution plan. Why? The government is not entitled to take money away from one person and give it to another. Total societal utility will increase if the plan is enacted. The plan benefits Maria, who is the least well off member of society.
Back to Assignment Attempts 08 Keep the Highest 0.8/4 4. Redistributive philosophies and incentives Consider a society consisting of two people. Kevin earns an income of $115,000 per year and Maria earns an income of $40,000 per year. The government is considering a redistribution plan that would impose a 15% tax on Kevin's income and give the revenue to Maria without any incentive distortion, Kevin would retain $97,750 and Maria would end up with $57,250. However, let us assume that since Kevin will not receive all the income he earns, he decides to work less and earn an income of only $95,000, of which 15% x $95,000-$14,250 will be owed in taxes. With the redistribution plan, Kevin will take home an income of s The $14,250 that Kevin pays in taxes will be transferred by the government to Maria. Let us assume that since Maria now receives payment from the government, she will not work as many hours and will earn an income from work of only $35,000 instead of her initial $40,000. With the redistribution plan, Maria's total income (including the government payment received) is now s Without a redistribution plan, total income in this society is 1 Therefore, the redistribution plan According to the maximin criterion, the government After the redistribution plan is implemented, total income in this society is total income in this society. implement this redistribution plan. Why? The government is not entitled to take money away from one person and give it to another. Total societal utility will increase if the plan is enacted. The plan benefits Maria, who is the least well off member of society.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Keep the Highest 0.8/41
4. Redistributive philosophies and incentives
Consider a society consisting of two people. Kevin earns an income of $115,000 per year and Maria earns an income of $40,000 per year. The
government is considering a redistribution plan that would impose a 15% tax on Kevin's income and give the revenue to Maria.
Without any incentive distortion, Kevin would retain $97,750 and Maria would end up with $57,250. However, let us assume that since Kevin will not
receive all the income he earns, he decides to work less and earn an income of only $95,000, of which 15% x $95,000 $14,250 will be owed in taxes.
With the redistribution plan, Kevin will take home an income of s
The $14,250 that Kevin pays in taxes will be transferred by the government to Maria. Let us assume that since Maria now receives payment from the
government, she will not work as many hours and will earn an income from work of only $35,000 instead of her initial $40,000.
With the redistribution plan, Maria's total income (including the government payment received) is now s
Without a redistribution plan, total income in this society is 1
1
Therefore, the redistribution plan
According to the maximin criterion, the government
After the redistribution plan is implemented, total income in this society is
total income in this society.
implement this redistribution plan. Why?
The government is not entitled to take money away from one person and give it to another.
Total societal utility will increase if the plan is enacted.
The plan benefits Maria, who is the least well off member of society.
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