7. Self-employed workers in the United States must pay Social Security taxes equal to 12.4% of any income up to $147,000 in 2022. This income level of $147,000 is known as the “cap.” Income in excess of the cap is not subject to Social Security tax, so self-employed workers with incomes exceeding $147,000 pay

× =

$147,000 0.124 $18,228. Now consider two proposals designed to increase Social Security tax rev enue. Proposal A increases the cap to $177,822.60 so that Social Security taxes equal 12.4% of income up to

$177,822.60. Proposal B increases the Social Security tax rate to 15%, but leaves the cap unchanged at $147,000.

For people with income that always exceeds the cap, the amount of Social Security tax is the same under Proposal A (

× =

)

$177,822.60 0.124 $22,050 as under Proposal B (

× =

)

$147,000 0.15 $22,050 . There are no planned changes in future Social Security benefits anticipated by current workers.

a. Sally is self-employed and earns $200,000 per year.

What are the effects of Proposal A and Proposal B on Sally’s labor supply? Under which proposal would she supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.

b. Fred is self-employed and earns $50,000 per year.

What are the effects of Proposal A and Proposal B on Fred’s labor supply? Under which proposal would he supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.