Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
Question
Chapter 28, Problem 6CQ
To determine

Impact of income transfer on income.

Blurred answer
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Mark Zuckerberg of Facebook and Elon Musk of Space X have taken risks to build to their businesses and been successful at it. The fundamental premise for their success mostly hinges on the ownership of private property and free market forces. For billionaires like them who have made their wealth mostly based on their own effort and perseverance, would it be fair to impose high income tax on them to redistribute their wealth to help the poor?
How will The Tax Reform for Acceleration and Inclusion will lessen the worsen poverty and income inequality in the country?
Consider a society consisting of two people. Edison earns an income of $85,000 per year and Hilary earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Edison's income and give the revenue to Hilary. Without any incentive distortion, Edison would retain $63,750 and Hilary would end up with $46,250. However, let us assume that since Edison will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25%×$75,000=$18,75025%×$75,000=$18,750 will be owed in taxes.   With the redistribution plan, Edison will take home an income of_________.   .   The $18,750 that Edison pays in taxes will be transferred by the government to Hilary. Let us assume that since Hilary now receives payment from the government, she will not work as many hours and will earn an income from work of only $24,000 instead of her initial $25,000.   With the redistribution plan, Hilary's total…
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