Share
Explore BrainMass

Consider a society with two people. Rosa earns an income of

Consider a society with two people. Rosa earns an income of $120,000 per year and Jake earns an income of $45,000 per year. The government is considering a redistribution plan that would impose a 23% tax on Rosa's income and give the revenue to Jake. This policy distorts Rosa's and Jake's incentives, such that instead Rosa retaining $92,400 and Jake ending up with $72,600, Rosa would have an income of $77,000, and Jake would have an income of $65,000 if this redistributive plan were implemented.

Specifically, since Rosa will not receive the income she earns, she decides to work less and earn an income of only $100,000, of which $23,000 (23% of $100,000) will be owed in taxes. So Rosa will take home an income of $77,000. The $23,000 that Rosa pays in taxes will be transferred by the government to Jake. Since Jake now receives payment from the government, he will not work as many hours and will earn an income of $42,000 instead of his initial $45,000. So Jake total income, which includes his income from work and the government payment will be $42,000 + $23,000=$65,000.

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.

Solution Preview

Without a redistribution plan, total income in this society is _165,000_. After the redistribution plan is implemented, total income in this society is____142,000_______. Therefore, the redistribution plan ____decreases________total income in this society.

120,000 + 45,000 = 165,000

100,000 + 42,000 = 142,000 : It doesn't matter what her take home pay is. ...

Solution Summary

Consider a society with two people. Rosa earns an income of $120,000 per year and Jake earns an income of $45,000 per year. The government is considering a redistribution plan that would impose a 23% tax on Rosa's income and give the revenue to Jake. This policy distorts Rosa's and Jake's incentives, such that instead Rosa retaining $92,400 and Jake ending up with $72,600, Rosa would have an income of $77,000, and Jake would have an income of $65,000 if this redistributive plan were implemented.

Specifically, since Rosa will not receive the income she earns, she decides to work less and earn an income of only $100,000, of which $23,000 (23% of $100,000) will be owed in taxes. So Rosa will take home an income of $77,000. The $23,000 that Rosa pays in taxes will be transferred by the government to Jake. Since Jake now receives payment from the government, he will not work as many hours and will earn an income of $42,000 instead of his initial $45,000. So Jake total income, which includes his income from work and the government payment will be $42,000 + $23,000=$65,000.

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.

$2.19