10. This question is about inequality. (a) Let r denote the rate of return on capital and g the growth rate of national income. Explain why r > g. Why does this imply that inequality will increase? (30 marks] (b) Saez (2001) derives the following formula for the top marginal tax rate on income, T: 1 T = 1+ E (2) Explain what the parameters a and are and how they deter- mine the top tax rate. [20 marks] (c) In deriving the above formula, what is the assumption Saez (2001) makes regarding the relative weight we attach to those at the bottom versus those at the top of the income distribution? [15 marks] (d) What is the optimal top tax rate if a 1.5 and = 2? What is it instead if : 0.2? (15 marks] (e) In light of (c) and (d), give two reasons people might disagree about what the tax rate on top incomes ought to be. [20 marks] 10. This question is about inequality. (a) Let r denote the rate of return on capital and g the growth rate of national income. Explain why r > g. Why does this imply that inequality will increase? (30 marks] (b) Saez (2001) derives the following formula for the top marginal tax rate on income, T: 1 T = 1+ E (2) Explain what the parameters a and are and how they deter- mine the top tax rate. [20 marks] (c) In deriving the above formula, what is the assumption Saez (2001) makes regarding the relative weight we attach to those at the bottom versus those at the top of the income distribution? [15 marks] (d) What is the optimal top tax rate if a 1.5 and = 2? What is it instead if : 0.2? (15 marks] (e) In light of (c) and (d), give two reasons people might disagree about what the tax rate on top incomes ought to be. [20 marks]