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4 Redistribution in democracy Assume that each individual, i, gets income yi, and the average income is . The tax rate is t, where 0 t 1. Each...
4 Redistribution in democracy
Assume that each individual, i, gets income yi, and the average income is ȳ. The tax rate is t, where 0 ≤ t ≤ 1. Each individual also get a universal transfer, f . This transfer comes from tax net of deadweight loss f = (t − 0.5bt2)ȳ.
- 4 What does higher b suggest?
- What is each individual's net income, πi?
- What is the optimal tax rate for each individual, ti, respectively?
- Will the rich prefer a positive tax?
- Assume that the tax rate is decided by majority voting. Denote the median income as ym. What will the voted tax rate be?
- Assume that the median income is smaller than the average income. Given the average income, does lower median income suggest more or less severe inequality?
- Will more severe inequality (given ȳ, lower ym) increase or decrease the voted tax rate? Why?
- Will higher efficiency in tax collection, i.e., lower b, increase or decrease the voted tax rate? Why?
- Why does this makes sense? Hint: For each individual, what are the implications of a higher tax rate? How will higher efficiency in tax collection affect those implications?