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10. In the country of Noname, there have historically been no taxes. A new Congress is elected in Noname and implements the following tax reform: Every individual in the country will receive a universal basic income of $50 annually, which will be paid for by a tax rate of 20% on pre-tax income over $100 annually (this means the first $100 is exempt and a tax of 20% applies only to the income in excess of $100). Everyone who chooses to work can earn a wage of $5 (pre-tax) per hour worked both before and after the reform.

10. In the country of Noname, there have historically been no taxes. A new Congress is elected in Noname and implements the following tax reform: Every individual in the country will receive a universal basic income of $50 annually, which will be paid for by a tax rate of 20% on pre-tax income over $100 annually (this means the first $100 is exempt and a tax of 20% applies only to the income in excess of $100). Everyone who chooses to work can earn a wage of $5 (pre-tax) per hour worked both before and after the reform.

Economics (MindTap Course List)
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter11: Fiscal Policy And The Federal Budget
Section: Chapter Questions
Problem 5WNG
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In the country of Noname, there have historically been no taxes. A new Congress is elected in Noname and implements the following tax reform: 10. Every individual in the country will receive a universal basic income of $50 annually, which will be paid for by a tax rate of 20% on pre-tax income over $100 annually (this means the first $100 is exempt and a tax of 20% applies only to the income in excess of $100). Everyone who chooses to work can earn a wage of $5 (pre-tax) per hour worked both before and after the reform. a) For each pre-reform labor supply (in hours) in the table below, determine the sign of the substitution effect, income effect and total effect of the reform compared to a baseline with no such tax change, and fill in that determination on the following table. Use ↑ to indicate if the effect incentivizes work, t if it disincentives work, 0 is there is no effect, and ? if the effect is uncertain. Pre-reform labor supply Substitution effect Income effect Total effect 10 30 80 Now suppose that the demand for labor is Q=84-2W and the labor supply function is Q=2W. Assume that there are no externalities or pre-existing tax (ignore the income tax here). The government decides to raise revenue by taxing a unit payroll tax t=2 on the firm. a) Calculate the pre-tax equilibrium, and the post-tax equilibrium. Graph the supply and demand curves, how the curves shift after the implementation of the tax, and the pre-tax equilibrium, and the post-tax equilibrium. b) Calculate the tax incidence for firms and workers. Calculate the deadweight loss (DWL) and illustrate the DWL in the graph. c) Recalculate the tax incidence and DWL using elasticities. d) Now, suppose the payroll tax is collected for the social security payment in the future. The corresponding value of the social security payment is one dollar for each dollar of the tax payment. Mathematically, labor supply curve becomes Q=2(W+2). What is the DWL and tax incidence of the payroll tax?
Transcribed Image Text:In the country of Noname, there have historically been no taxes. A new Congress is elected in Noname and implements the following tax reform: 10. Every individual in the country will receive a universal basic income of $50 annually, which will be paid for by a tax rate of 20% on pre-tax income over $100 annually (this means the first $100 is exempt and a tax of 20% applies only to the income in excess of $100). Everyone who chooses to work can earn a wage of $5 (pre-tax) per hour worked both before and after the reform. a) For each pre-reform labor supply (in hours) in the table below, determine the sign of the substitution effect, income effect and total effect of the reform compared to a baseline with no such tax change, and fill in that determination on the following table. Use ↑ to indicate if the effect incentivizes work, t if it disincentives work, 0 is there is no effect, and ? if the effect is uncertain. Pre-reform labor supply Substitution effect Income effect Total effect 10 30 80 Now suppose that the demand for labor is Q=84-2W and the labor supply function is Q=2W. Assume that there are no externalities or pre-existing tax (ignore the income tax here). The government decides to raise revenue by taxing a unit payroll tax t=2 on the firm. a) Calculate the pre-tax equilibrium, and the post-tax equilibrium. Graph the supply and demand curves, how the curves shift after the implementation of the tax, and the pre-tax equilibrium, and the post-tax equilibrium. b) Calculate the tax incidence for firms and workers. Calculate the deadweight loss (DWL) and illustrate the DWL in the graph. c) Recalculate the tax incidence and DWL using elasticities. d) Now, suppose the payroll tax is collected for the social security payment in the future. The corresponding value of the social security payment is one dollar for each dollar of the tax payment. Mathematically, labor supply curve becomes Q=2(W+2). What is the DWL and tax incidence of the payroll tax?
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