Question

Homework (Ch 20) 4. Redistributive philosophies and incentives Consider a society consisting of two people. Manuel earns an income of $115,000 per year and Poornima earns an income of $30,000 per year. The government is considering a redistribution plan that would impose a 15% tax on Manuel's income and give the revenue to Poornima. Without any incentive distortion, Manuel would retain $97,750 and Poornima would end up with $47,250. However, let us assume that since Manuel will not receive all the income he earns, he decides to work less and eam an income of only $95,000, of which 15% x 895,000 = $14,250 will be owed in taxes With the redistribution plan, Manuel will take home an income of $ The $14,250 that Manuel pays in taxes will be transferred by the government to Poornima. Let us assume that since Poornima now receives payment from the government, she will not work as many hours and will earn an income from work of only $25,000 instead of her initial $30,000 With the redistribution plan, Poornima's total income (including the government payment received) is now $ Without a redistribution plan, total income in this society is $ is s Therefore, the redistribution plan After the redistribution plan is implemented, total income in this society total income in this society According to the maximin criterion, the government implement this redistribution plan. Why? d The plan benefits Poornima, 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.

Answer 1

100,750
(Income with redistributive plan = 115,000 - 14,250 = 100,750)

39,250
(Poornima's income = 14,250 + 25,000 = 39,250)

145,000; 140,000; decreases
(Without plan, income = 115,000 + 30,000 = 145,000; With plan, income = 100,750 + 39,250 = 140,000)

should
The plan benefits Poornima, who is the least well off member of society.
(As Poornima's income increases, so, according to maximin criterion, it should be implemented.)