Suppose that you have 24 hours per day to allocate between leisure and working at a wage of $1 per hour. Draw your budget line between leisure and dollars. One day the government simultaneously institutes two new programs: a 50% income tax and a plan whereby everybody in the country receives a gift from the government of $6 each year.
a. Draw your new budget line.
b. Suppose that the government chose the level of $6 for the gift because it precisely exhausts the income from the tax. Explain why this means that the average taxpayer must be paying exactly $6 in tax.
c. Assume that you are the average taxpayer, and draw your new optimum. Is it on, above, or below your original budget line?
d. As the average taxpayer, are you working harder or less hard than before the programs went into effect? Are you happier or less happy? How do you know?