5. POLICY 1: A policy to reduce the Headcount Index Assume we are in the year 2004, and you are hired by the president of South Africa to design a policy to reduce the poverty headcount Index as much as possible. In order to simplify your calculations, assume that if the income of a household is exactly equal to the poverty line Z=375, the household is not poor. In order to implement the policy, the president imposes a tax of 15% on the income of all households earning 1,500 Rand per capita or more. 5 a. How much money does the South African government collect in tax revenues in 2004? [4 points] Total amount collected in tax revenues b. Describe - in words- your policy (how would you allocate the tax revenues to poor households to achieve the goal of minimizing the poverty headcount index?) [8 points] Hint: Under this policy, you should not give a transfer to any household unless that transfer changes their poverty status. You may end up with a few dollars left (total amount transferred can be less than the total amount collected in taxes) C. Recompute the Poverty Head Count Index, the Poverty Gap Index, and the FGT-2 index after your tax and transfer policy is implemented. Table 4: Poverty Measures After Policy 1 [2 point each] 2004-after implementing your policy Headcount Index Poverty Gap Index FGT-26. POLICY 2: A policy to reduce extreme poverty The president is also considering an alternative policy whose objective is to reduce extreme poverty. This policy consists of (1) imposing a tax of 15% on the incomes of households (in year 2004) earning 1,500 Rand per capita or more (as in Policy 1 above) and (2) transferring to each household earning less than 240 Rand per capita an amount of money enough to bring their income per capita up to exactly 240 Rand per capita. a. How much money would the government need to spend in order to implement this policy [5 points] Total amount spent by the government b. Recompute the Poverty Head Count Index, Poverty Gap Index, and FGT-2 after this new policy. Table 5: Poverty Measures [2 point each] 2004-after implementing the alternative policy Headcount Index Poverty Gap Index FGT-2