Consider a society consisting of two people. Raphael earns an income of $90,000 per year and Susan earns an income of $35,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Raphael's income and give the revenue to Susan. Without any incentive distortion, Raphael would retain $72,000 and Susan would end up with $53,000. However, let us assume that since Raphael will not receive all the income he earns, he decides to work less and earn an income of only $80,000, of which 20% × $80,000 = $16,000 will be owed in taxes. With the redistribution plan, Raphael will take home an income of 5 The $16,000 that Raphael pays in taxes will be transferred by the government to Susan. Let us assume that since Susan now receives payment from the government, she will not work as many hours and will earn an income from work of only $34,000 instead of her initial $35,000. With the redistribution plan, Susan's total income (including the government payment received) is now S Without a redistribution plan, total income in this society is S is 5 ]. After the redistribution plan is implemented, total income in this society 1. Therefore, the redistribution plan total income in this society. According to the libertarian political philosophy, the government implement this redistribution plan. Why? The plan benefits Susan, who is the least well off member of society. 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.
Consider a society consisting of two people. Raphael earns an income of $90,000 per year and Susan earns an income of $35,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Raphael's income and give the revenue to Susan. Without any incentive distortion, Raphael would retain $72,000 and Susan would end up with $53,000. However, let us assume that since Raphael will not receive all the income he earns, he decides to work less and earn an income of only $80,000, of which 20% × $80,000 = $16,000 will be owed in taxes. With the redistribution plan, Raphael will take home an income of 5 The $16,000 that Raphael pays in taxes will be transferred by the government to Susan. Let us assume that since Susan now receives payment from the government, she will not work as many hours and will earn an income from work of only $34,000 instead of her initial $35,000. With the redistribution plan, Susan's total income (including the government payment received) is now S Without a redistribution plan, total income in this society is S is 5 ]. After the redistribution plan is implemented, total income in this society 1. Therefore, the redistribution plan total income in this society. According to the libertarian political philosophy, the government implement this redistribution plan. Why? The plan benefits Susan, who is the least well off member of society. 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:4. Redistributive philosophies and incentives
Consider a society consisting of two people. Raphael earns an income of $90,000 per year and Susan earns an income of $35,000 per year. The
government is considering a redistribution plan that would impose a 20% tax on Raphael's income and give the revenue to Susan.
Without any incentive distortion, Raphael would retain $72,000 and Susan would end up with $53,000. However, let us assume that since Raphael will
not receive all the income he earns, he decides to work less and earn an income of only $80,000, of which 20% x $80,000 = $16,000 will be owed in
taxes.
With the redistribution plan, Raphael will take home an income of S
The $16,000 that Raphael pays in taxes will be transferred by the government to Susan. Let us assume that since Susan now receives payment from
the government, she will not work as many hours and will earn an income from work of only $34,000 instead of her initial $35,000.
With the redistribution plan, Susan's total income (including the government payment received) is now S
After the redistribution plan is implemented, total income in this society
Without a redistribution plan, total income in this society is S
is s
J. Therefore, the redistribution plan
total income in this society.
According to the libertarian political philosophy, the government
implement this redistribution plan. Why?
The plan benefits Susan, who is the least well off member of society.
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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education