Question

Suppose the proposal was to procide the same level of clean-up, but to tax waxh person accordinf ti their income breacket so that the porest, second-poorest, second-richest, and richest groups were taxed at rates of $1, $8, $700, and $3,291 per person, respectively, i stead of distributing the tax burden equally.

e. (6 points) Suppose the proposal was to provide the same level of clean-up, but to tax each person according to their income bracket so that the poorest, second-poorest, second- richest, and richest groups were taxed at rates of $1, $8, $700, and $3,291 per person, respectively, instead of distributing the tax burden equally. i. Would tax receipts be sufficient to pay for the pollution reduction? ii. Would the new proposal pass a majority vote referendum? Also, would it be a Pareto Improvement relative to the current pollution level?

Answer 1

(i) The tax receipts through the new tax policy may be called sufficient for the pollution reduction, where the taxation system is suggested as $1 on the poorest, $8 on the second poorest, $700 on the second richest and $3291 on the richest. This new taxation is progressive taxation where the higher income groups have to pay more taxes. Under this system, more taxes can be collected to clean-up pollution as the tax rate is high on the richest. Instead of this, if more taxes imposed on the poor then the tax receipts will be low and that will not be sufficient for pollution clean-up. Moreover, the new system is important for the poor, because they also have to pay some amount of tax instead of non-payment. Due to which the poorest also may be aware to reduce pollution.

(ii) The new proposal would pass through a majority because it is a progressive tax regime. In the context of the current pollution level, this system is correct. If the richest will not pay high tax then pollution cannot be controlled through the means of expenditure on pollution control.

Relative to the current pollution level it would be a Pareto Improvement. The Pareto Improvement is a condition where reallocation makes at least one person better off without making any other individual worse off. The new tax proposal relative to the current pollution can be called Pareto Improvement because everyone in this system has to pay taxes and Poorest have to pay less tax, that does not make them worse off. On the other hand richest although pay high tax it also does not make them worse off as they earn a higher income. This tax system may benefit all the people through a reduction in pollution. In this context it can be considered as Pareto Improvement.