Homework Clinic
Social Science Clinic => Economics => Macroeconomics => Topic started by: abcdef9106 on Nov 23, 2022
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Welfare and Transfers
The country Scindo has 20 million households. Ten million are poor households that each have labor market earnings of $18,000 per year, and ten million are rich households that each have labor market earnings of $81,000 per year. Suppose the government enacted a marginal tax of 35 percent on all labor market earnings above $18,000 and transferred this money to poor households. What is the income for poor households after taxes and redistribution? What is the income for rich households after taxes and redistribution?
◦ $46,350.00, $52,650.00
◦ $40,050, $58,950
◦ $40,050, $52,650.00
◦ $46,350.00, $58,950
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$40,050, $58,950
The marginal tax rate is the fraction of each additional dollar of income that must be paid in taxes. In this example, every dollar after the first $18,000 is subject to a 35 percent tax.
Therefore, for the rich households, the tax = marginal tax*(income above $18,000).
Tax = 35/100*(81,000-18,000) = 0.35*(81,000-18,000) = $22,050.00
The rich pay $22,050.00, which is given to the poor.
Therefore, the income for poor households after taxes and redistribution = original income + taxes from rich = 18,000 + 22,050.00 = $40,050.
The income for rich households after taxes and redistribution = original income - taxes paid = 81,000 - 22,050.00 = $58,950.