Question

An estimate of the efficiency-loss ratio of taxes on labor income is 15 percent. The efficiency-loss ratio of taxes on capital income is estimated to be 45 percent. What is the main reason behind this difference? Assuming that these estimates are accurate, calculate the change in well-being that would result from a S10 billion reduction in taxes on capital income, accompanied by a $10 billion increase in taxes on labor income. What would be the income distribution effects of such a change?

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