5. Redistributive philosophies and incentives Consider a society comprised of tw

Question

5. Redistributive philosophies and incentives Consider a society comprised of two people. Yakov earns an income of $90,000 per year and Ana earns an income of $35,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Yakov's income and give the revenue to Ana. Without any incentive distortion, Yakov would retain $72,000 and Ana would end up with $53,000. However, let us assume that since Yakov will not receive all the income he earns, he decides to work less and earn an income of only $80,000, of which 20%× $80.000= $16,000 will be owed in taxes. With the redistribution plan, Yakov will take home an income of$ The $16,000 that Yakov pays in taxes will be transferred by the government to Ana. Let us assume that since Ana now receives payment from the government, she will not work as many hours and will earn an income from work of only $34,000 instead of her initial $35,000 With the redistribution plan, Ana's total income (including the government payment received) is now $ . After the redistribution plan is implemented, total income in this society Without a redistribution plan, total income in this society is $ is $ . Therefore, the redistribution plan total income in this society. According to the libertarian political philosophy, the government implement this redistribution plan. Why? The government is not entitled to take money away from one person and give it to another. The plan benefits Ana, who is the least well off member of society. Total societal utility will increase if the plan is enacted.

Explanation / Answer

With redistribution plan, Anna total income=34000+16000=50000

Without redistribution plan total income in the society is 90000+35000=125000

With redistribition total income=80000+34000=114000

Therefore total income decreases in the society

Acc. To libertarian, the govt. Should implemenet the redistribution plan because the plan benefit Ana, whon is the least well off member of society.

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