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

Question

5. Redistributive philosophies and incentives Consider a society comprised of two people. Hubert earns an income of $85,000 per year and Kate earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Hubert's income and give the revenue to Kate. Without any incentive distortion, Hubert would retain $63,750 and Kate would end up with $46,250. However, let us assume that since Hubert will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25%x $75,000= $18,750 will be owed in taxes. With the redistribution plan, Hubert will take home an income of The $18,750 that Hubert pays in taxes will be transferred by the government to Kate. Let us assume that since Kate now receives payment from the government, she will not work as many hours and will earn an income from work of only $24,000 instead of her initial $25,000. With the redistribution plan, Kate's total income (including the government received) is now$

Explanation / Answer

With the redistribution plan , Hubert will take home an income of = $ 56,250

With the redistribution plan , Kate's total income is now = $ 42,750

Without a redistribution plan , the total income in the society is = $ 85,000 + $ 25,000 ( $ 110,000)

After the redistribution plan is implemented , total income in this society is = $ 75,000 + $ 24,000 ( $ 99,000)

Therefore the redistribution plan decreases total income in the society .

According to the Libertarian philosophy , the government should implement this policy because

The correct option is B : - Total societal utility will increase if the plan is enacted .

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