Question
Consider an economy where the income tax brackets are as follows: Earned income up to $20,000: = 0 Earned income above $20,000: = .50 Consider
Consider an economy where the income tax brackets are as follows: Earned income up to $20,000: = 0 Earned income above $20,000: = .50 Consider a married worker who files singly (that is, pays taxes based only on their own income). This worker's utility over consumption and labor is given by U(c,h) = 20c1 2 h This work can supply labor at a wage of w = 10. (a) What will this worker's labor supply and earned income be? 10 points.
(b) How much tax will this worker pay? 5 points.
Suppose this worker's spouse supplies labor inelasticly and has pre- tax earnings of $50,000. (a) If this worker instead filed taxes jointly - with taxes paid based on household income - what will the worker's new labor supply be? 5 points.
(b) Use this result to discuss the finding that the elasticity of labor supply for secondary earner spouses is much higher than that of primary earners. 5 points. 1
(c) What is the "marriage penalty" this household will pay if they choose to file jointly?
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