Consider a society consisting of two people. Jake earns an income of $100,000 per year and Latasha earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Jake's income and give the revenue to Latasha. Without any incentive distortion, Jake would retain $80,000 and Latasha would end up with $45,000. However, let us assume that since Jake will not receive all the income he earns, he decides to work less and earn an income of only $85,000, of which 20 % x $85,000 $17,000 will be owed in taxes. With the redistribution plan, Jake will take home an income of s The $17,000 that Jake pays in taxes will be transferred by the government to Latasha. Let us assume that since Latasha now receives payment from the government, she will not work as many hours and will earn an income from work of only $23,000 instead of her initial $25,000. With the redistribution plan, Latasha's total income (including the government payment received) is now 1 Without a redistribution plan, total income in this society is s Therefore, the redistribution plan decreases According to the maximin criterion, the government should not After the redistribution plan is implemented, total income in this society total income in this society. implement this redistribution plan. Why? The plan benefits Latasha, 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. Jake earns an income of $100,000 per year and Latasha earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Jake's income and give the revenue to Latasha. Without any incentive distortion, Jake would retain $80,000 and Latasha would end up with $45,000. However, let us assume that since Jake will not receive all the income he earns, he decides to work less and earn an income of only $85,000, of which 20 % x $85,000 $17,000 will be owed in taxes. With the redistribution plan, Jake will take home an income of s The $17,000 that Jake pays in taxes will be transferred by the government to Latasha. Let us assume that since Latasha now receives payment from the government, she will not work as many hours and will earn an income from work of only $23,000 instead of her initial $25,000. With the redistribution plan, Latasha's total income (including the government payment received) is now 1 Without a redistribution plan, total income in this society is s Therefore, the redistribution plan decreases According to the maximin criterion, the government should not After the redistribution plan is implemented, total income in this society total income in this society. implement this redistribution plan. Why? The plan benefits Latasha, 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
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Transcribed Image Text:Consider a society consisting of two people. Jake earns an income of $100,000 per year and Latasha earns an income of $25,000 per year. The
government is considering a redistribution plan that would impose a 20% tax on Jake's income and give the revenue to Latasha.
Without any incentive distortion, Jake would retain $80,000 and Latasha would end up with $45,000. However, let us assume that since Jake will not
receive all the income he earns, he decides to work less and earn an income of only $85,000, of which 20 % x $85,000 $17,000 will be owed in
taxes.
With the redistribution plan, Jake will take home an income of
The $17,000 that Jake pays in taxes will be transferred by the government to Latasha. Let us assume that since Latasha now receives payment from
the government, she will not work as many hours and will earn an income from work of only $23,000 instead of her initial $25,000.
With the redistribution plan, Latasha's total income (including the government payment received) is now 3
Without a redistribution plan, total income in this society is s
Therefore, the redistribution plan decreases
According to the maximin criterion, the government should not.
After the redistribution plan is implemented, total income in this society
total income in this society.
Total societal utility will increase if the plan is enacted.
implement this redistribution plan. Why?
The plan benefits Latasha, 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.
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