Redistributive philosophies and incentives Consider a society comprised of two people. Shen earns...


Redistributive philosophies and incentives. Consider a society comprised of two people. Shen earns an income of $85,000 per year and Valerie earns an income of $30,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Shen's income and give the revenue to Valerie. Without any incentive distortion, Shen would retain $63,750 and Valerie would end up with $51,250. However, let us assume that since Shen will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25% {eq}\times {/eq} $75,000 = $18,750 will be owed in taxes.

With the redistribution plan, Shen will take home an income of _____.

The $18,750 that Shen pays in taxes will be transferred by the government to Valerie. Let us assume that since Valerie 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, Valerie'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.

According to the utilitarian political philosophy, the $18,750 transferred from Shen to Valerie will benefit Valerie _____ than it hurts Shen. Which of the following statements is true according to this philosophy?

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

b. The government should definitely institute the plan because it will increase overall utility.

c. The government should not institute the plan because it has no right to take money from one person and give it to another.

Income Redistribution:

In economics, the term "Income redistribution" can be defined as the government policy in which the government imposes a high tax on the higher income persons and distribute that income to the poor in the form of cash and kind transfers.

Answer and Explanation: 1

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In this case, the after-tax income of Shen can be estimated as:

After-tax income = Before Tax income - Tax

After-tax income = $75,000 - $18,750


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Forms of Economic Distribution & Exchange within Society


Chapter 21 / Lesson 12

Every society has a different way of organizing the distribution and exchange of goods. In this lesson, explore some different forms of economic distribution and exchange, including generalized and balanced reciprocity, redistribution, and market exchange.

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