The United States has established a progressive income tax system, where a worker’s tax rate on earnings increases as she earns more money. There are 168 hours in a given week. Assume that for the first 56 hours worked, the tax rate is t1, which means that the net real wage is w*(1-t1). After working the 56th hour, the worker jumps to a higher tax rate t2. After the 112th hour worked, the individual jumps to an even higher tax rate, t3. (a) During most election years, some politicians argue that a having a flat tax system is better. Assume that there is a proposal to institute a flat tax, where all workers pay a tax rate equal to t4, which is greater than t3. On the same set of axes, graph the budget constraints associated with the progressive tax system and the flat tax system. Make sure to label all of the slopes. (b) Would moving to this proposed flat tax system likely encourage more or fewer hours worked for relatively high-wage workers? Make sure to explain your answer (a written explanation is sufficient; you do not have to alter the graph from part a) (c) Would moving to this proposed flat tax system likely encourage more or fewer hours worked for relatively low-wage workers? Make sure to explain your answer (a written explanation is sufficient; you do not have to alter the graph from part a)
The United States has established a progressive income tax system, where a worker’s tax rate on
earnings increases as she earns more money. There are 168 hours in a given week. Assume that
for the first 56 hours worked, the tax rate is t1, which means that the net real wage is w*(1-t1).
After working the 56th hour, the worker jumps to a higher tax rate t2. After the 112th hour
worked, the individual jumps to an even higher tax rate, t3.
(a) During most election years, some politicians argue that a having a flat tax system is
better. Assume that there is a proposal to institute a flat tax, where all workers pay a tax
rate equal to t4, which is greater than t3. On the same set of axes, graph the budget
constraints associated with the progressive tax system and the flat tax system. Make sure
to label all of the slopes.
(b) Would moving to this proposed flat tax system likely encourage more or fewer hours
worked for relatively high-wage workers? Make sure to explain your answer (a written
explanation is sufficient; you do not have to alter the graph from part a)
(c) Would moving to this proposed flat tax system likely encourage more or fewer hours
worked for relatively low-wage workers? Make sure to explain your answer (a written
explanation is sufficient; you do not have to alter the graph from part a)
A budget constraint represents the various combinations of goods and services that a consumer can afford to purchase, given their income and the prices of goods and services. Taxes can affect a consumer's budget constraint by reducing their disposable income, which is the income remaining after taxes are paid.
The slope of the budget constraint is affected by the tax system in place, with a progressive tax system leading to a steeper slope and a flat tax system leading to a constant slope. The specific tax rates involved and their distribution across income earners can also impact the consumer's budget constraint and consumption choices.
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