When filing an income tax return, one can claim a deduction for charitable contributions. Let's simplify the incometax system and assume that the tax is proportional to the level of taxable income (income after deductions).(a) Suppose we increase the marginal income tax rate. An economic adviser claims that the effect of this tax change onthe amount of charitable contributions is uncertain. Plot a simple graph that illustrates this situation (it involvesthe choice between charitable contributions and other spending), use it to explain why the effect is uncertain andexplain what it depends on.(b) Now suppose that we instead increase the marginal tax rate but also provide a transfer that makes the bundlethat used to be optimal before tax increased just affordable. According to the economic adviser this policy changewill make people contribute more to charity. Why?

Income Tax is defined as a tax that the government imposes on the income that is generated by the…

When filing an income tax return, one can claim a deduction for charitable contributions. Let's simplify the income tax system and assume that the tax is proportional to the level of taxable income (income after deductions).

When filing an income tax return, one can claim a deduction for charitable contributions. Let's simplify the income tax system and assume that the tax is proportional to the level of taxable income (income after deductions).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.15P

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Question

When filing an income tax return, one can claim a deduction for charitable contributions. Let's simplify the income
tax system and assume that the tax is proportional to the level of taxable income (income after deductions).
(a) Suppose we increase the marginal income tax rate. An economic adviser claims that the effect of this tax change on
the amount of charitable contributions is uncertain. Plot a simple graph that illustrates this situation (it involves
the choice between charitable contributions and other spending), use it to explain why the effect is uncertain and
explain what it depends on.
(b) Now suppose that we instead increase the marginal tax rate but also provide a transfer that makes the bundle
that used to be optimal before tax increased just affordable. According to the economic adviser this policy change
will make people contribute more to charity. Why?

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