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4. Redistributive philosophies and incentives Consider a society consisting of two people. Gilberto earns an income of $120,000 per year and Juanita earns an income
4. Redistributive philosophies and incentives Consider a society consisting of two people. Gilberto earns an income of $120,000 per year and Juanita earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Gilberto's income and give the revenue to Juanita. Without any incentive distortion, Gilberto would retain $96,000 and Juanita would end up with $49,000. However, let us assume that since Gilberto will not receive all the income he earns, he decides to work less and earn an income of only $110,000, of which 20% x $110,000 = $22,000 will be owed in taxes. With the redistribution plan, Gilberto will take home an income of $ The $22,000 that Gilberto pays in taxes will be transferred by the government to Juanita. Let us assume that since Juanita now receives payment from the government, she will not work as many hours and will earn an income from work of only $24,000 instead of her initial $25,000, With the redistribution plan, Juanita's total income (including the government payment received) is now 5 Without a redistribution plan, total income in this society is S After the redistribution plan is Implemented, total income in this society Therefore, the redistribution plan total income in this society. According to the utilitarian political philosophy, the $22,000 transferred from Gilberto to Juanita will benefit Juanita than it hurts Gilberto, Which of the following statements is true according to this philosophy? Of The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss. O The government should not institute the plan because it has no right to take money from one person and give it to another. The government should definitely institute the plan because it will increase overall utility
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