1. Determine the effects of the introduction of the deduction on tax payıments. In particular (a) Graph the consumer's budget constraint. (b) Determine the optimization point for the case of a person who does not pay any taxes. Graph. (c) Determine the optimization point for the case of a person who pays taxes. Graph.
1. Determine the effects of the introduction of the deduction on tax payıments. In particular (a) Graph the consumer's budget constraint. (b) Determine the optimization point for the case of a person who does not pay any taxes. Graph. (c) Determine the optimization point for the case of a person who pays taxes. Graph.
Chapter12: The Partial Equilibrium Competitive Model
Section: Chapter Questions
Problem 12.10P
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![The Tax Cuts and Jobs (TCJ) Act of December 2017 introduced the largest reform to the U.S. tax
code in more than three decades. One of the most significant changes involved the introduction and
refinement of wage income taxes with standard deductions for low-income workers. This change can be
introduced into the representative consumer's problem by considering a tax rate of t = 0 for the first
I units of real wage income, followed by a proportional tax t on each unit of real wage income greater
than r. Therefore, the consumer's optimization problem can be re-expressed as follows:
Max U(C,1)
subject to
Jw(h - 1) + a, ifw(h – 1) <I
C =
(1)
(1- t)w(h – 1) + tx + a, otherwise
C20, 1>0
I. Determine the effects of the introduction of the deduction on tax payıments. In particular
(a) Graph the consumer's budget constraint.
(b) Determine the optimization point for the case of a person who does not pay any taxes. Graph.
(c) Determine the optimization point for the case of a person who pays taxes. Graph.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc8418593-1293-458a-84a6-bb23f87d8ef3%2F1a4d9c8c-9cbb-46ff-b1d7-b3a0f7dafad3%2Fpqp1axf_processed.jpeg&w=3840&q=75)
Transcribed Image Text:The Tax Cuts and Jobs (TCJ) Act of December 2017 introduced the largest reform to the U.S. tax
code in more than three decades. One of the most significant changes involved the introduction and
refinement of wage income taxes with standard deductions for low-income workers. This change can be
introduced into the representative consumer's problem by considering a tax rate of t = 0 for the first
I units of real wage income, followed by a proportional tax t on each unit of real wage income greater
than r. Therefore, the consumer's optimization problem can be re-expressed as follows:
Max U(C,1)
subject to
Jw(h - 1) + a, ifw(h – 1) <I
C =
(1)
(1- t)w(h – 1) + tx + a, otherwise
C20, 1>0
I. Determine the effects of the introduction of the deduction on tax payıments. In particular
(a) Graph the consumer's budget constraint.
(b) Determine the optimization point for the case of a person who does not pay any taxes. Graph.
(c) Determine the optimization point for the case of a person who pays taxes. Graph.
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