flat income tax, where the marginal tax rate is constant. Several political leaders, including some recent candidates for the presidency, have proposed a Q F . . L Time constraint 0 Show that if each person is allowed a "personal deduction" where the rst $10,000 is untaxed, the \\ flat tax can be a progressive tax. l3\" The budget constraint without any taxes L1 is illustrated in the gure to the right. Let the price of a unit of consumption be $1.00 such that 10,000 units of consumption correspond to income of $10,000. Use the multipoint curved line drawing tool to graph the new budget constraint with a at tax Goods per day assessed on earnings beyond $10,000. Label this line 'LF'. Y Carefully follow the instructions above, and only draw the required objects. 10'000 : : Proponents of the at tax claim that it will stimulate production (relative to the current progressive income tax where marginal tax rates increase with income). Discuss the merits of their claim. @ Hz l-l1 Assume the bottom gure to the right illustrates the budget constraint with the at tax and no L, Leisure hours per day earnings deduction LF, and the budget constraint with a progressive tax LP. With the at tax (compared to the progressive tax), "'1? A. production will decrease because people will work fewer hours. 97 production will increase because some people will work more, but production will not decrease because no one will work less. production will only increase if the income effect is larger than the substitution effect. production will increase because people will work more hours. ["190 production will only increase if the substitution effect is larger than the income effect