Question

2. Redistributive philosophies and incentives Consider a society comprised of two people. Carlos earns an income of $100,000 per year and Deborah earns an income of $30,000 per year. The redistribution plan that would impose a 25% tax on Carlos's income and give the revenue to Deborah government is considering Without any incentive distortion, Carlos would retain $75,000 and Deborah would end up with $55,000. However, let us assume that since Carlos will not receive all the income he earns, he decides to work less and earn an income of only $90,000, of which 25%x $90,000 = $22,500 will be owed in taxes With the redistribution plan, Carlos will take home an income of $ The $22,500 that Carlos pays in taxes will be transferred by the government to Deborah. Let us assume that since Deborah now receives payment from the government, she will not work as many hours and will earn an income from work of only $29,000 instead of her initial $30,000 With the redistribution plan, Deborah's total income (including the government payment received) is now$ Without a redistribution plan, total income in this society is$ After the redistribution plan is implemented, total income in this society is . Therefore, the redistribution plan total income in this society. than it hurts Carlos According to the utilitarian political philosophy, the $22,500 transferred from Carlos to Deborah will benefit Deborah Which of the following statements is true according to this philosophy? The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss. OThe government should definitely institute the plan because it will increase overall utility. O The government should not institute the plan because it has no right to take money from one person and give it to another.

Answer 1

Income earned by Carlos = $90,000

Tax = 25%

Tax paid = $90,000 * 0.25 = $22,500

After tax income = $90,000 - $22,500 = $67,500

Thus,

With the redistribution plan, Carlos will take home an income of $67500.

Income earned by Deborah = $29,000

Transfer income received = $22,500

Total income = $29,000 + $22,500 = $51,500

Thus,

With the redistribution plan, Deborah's total income is now $51,500.

Without a redistribution plan, total income in this society is $130,000. After the redistribution plan is implemented, total income in this society is $119,000. Therefore, the redistribution plan has decreased total income in this society.

According to the utilitarian political philosophy, the $22,500 transferred from Carlos to Deborah will benefit Deborah less than it hurts Carlos.

Thus,

According to this philosophy, The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and efficiency loss.