Question

4. Redistributive philosophies and Incentives Consider a society consisting of two people. Sam eams an income of $120,000 per year and Teresa earns an income of $35,000 per year. The government is considering a redistribution plan that would impose a 15% tax on Sam's Income and give the revenue to Teresa. without any Incentive distortion, Sam would retain $102,000 and Teresa would end up with $53,000. However, let us assume that since Sam will not receive all the income he earns, he decides to work less and earn an income of only $100,000, of which 15% x $100,000 = $15,000 will be owed in taxes. with the redistribution plan, Sam will take home an income of S The $15,000 that Sam pays in taxes will be transferred by the government to Teresa. Let us assume that since Teresa now receives payment from the government, she will not work as many hours and will earn an income from work of only $30,000 instead of her initial $35,000, With the redistribution plan, Teresa's total income (including the government payment received) is now 5 Without a redistribution plan, total income in this society is $ Therefore, the redistribution plan After the redistribution plan is implemented, total income in this society total income in this society. is

Answer 1

Sam's income after he decided to work less

$110,000 Tax on Darnell's income = 20% of $100,000

=$20000

Then sam will take-home income will be =saml's income after he decided to work less - Tax on Darnell's income

=100000-20000

= $80, 000

2):-With the redistribution plan, sams total

will be now 35,000 + 15000= $50000

3. Without a redistribution plan, total income in the society is $120000+$35000

= $155000

After the redistribution plan, total income in the society is $20000 + $50000= $70,000. Therefore the redistribution plan decreased the total income in society.

4):-According to the maximum criteria, the government (will )implement this distribution plan.

5. The plan benefits teresa, who is the least well off member of society.