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
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