a. Consider 2 countries A and B. In country A no oneevades income while in country B everyone evades50% of the income. Policymakers in Country A reducethe tax rate from 20% to 10% which causes anincrease in labor supply. The reported taxable incomeof A increases from 50 to 100 billion dollars. At thesame time the policy makers of country B reduce thetax rate from 40% to 20%. While there is no changein labor supply response, the incentives to evade getreduced. The reported taxable income increases from100 to 150 billion dollars. Calculate the change inwelfare in both the countries. Which country has abigger change in the welfare? Briefly provide theintuition behind the results.b. In less than 100 words, briefly describe onesituation and associated empirical paper, where theabove calculations may be biased.

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100 to 150 billion dollars. Calculate the change in welfare in both the countries. Which country has bigger change in the welfare? Briefly provide the intuition bobind the rosults

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter8: Aggregate Demand And The Powerful Consumer

Section8.A: National Income Accounting

Problem 3TY

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Question

a. Consider 2 countries A and B. In country A no one
evades income while in country B everyone evades
50% of the income. Policymakers in Country A reduce
the tax rate from 20% to 10% which causes an
increase in labor supply. The reported taxable income
of A increases from 50 to 100 billion dollars. At the
same time the policy makers of country B reduce the
tax rate from 40% to 20%. While there is no change
in labor supply response, the incentives to evade get
reduced. The reported taxable income increases from
100 to 150 billion dollars. Calculate the change in
welfare in both the countries. Which country has a
bigger change in the welfare? Briefly provide the
intuition behind the results.
b. In less than 100 words, briefly describe one
situation and associated empirical paper, where the
above calculations may be biased.

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