Question

Rebecca is a policy-maker and she wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed. In other words, she wants to level the playing field. In her world, people only differ in their ability to pay and are otherwise identical. Assume that income is a good proxy for ability (to pay). This assumption implies that high earners have high ability. Assume also that ability is randomly given to each individual at birth and that it remains constant over time. Would Rebecca design a system in which high-earners are taxed more or are taxed less than low-earners? Why?

Answer 1

If we assume that ability is given from birth to different individual and remain constant as given in the question the Rebecca.

Now, in this question to , the police maker Rebecca seems to follow two tax system one is

1) Flat taxes wherein there is only one tax that is incone tax and is charged as the a percentage of the income earned by the pearson . For eg : 5%of the income earned by both low earners with income ₹10000 who pay the tax as ₹500. Further the high income earners with income ₹100000 pay the tax as ₹5000 . Where low earner is able to save ₹1000 after all the expenses and high earners are able to save ₹10000 after all the expenses which is exactly 10times in terms of income as well the savings as compared to the low earner

Hence, this way there is no extra pressure on the high earners to pay high income tax. Also they are rewarded for their high efforts as they saving are proportional to income.

So the high income earners are taxed less and this is said because they are not paying higher tax with respect to there income. Although in this case Rebeeca would design a system where high income earner are paying equal to low income earners without any discrimination.Hence they only differ on their ability to pay and are otherwise identical.

Further, since Rebecca wants to redistribute economic gains without any effort which I assume it to wealth hence she would also follow inheritance tax system. In this all the wealth created by one generation would be taken by the government and redistributed among the citizens.

Thank you!