Question

QUESTION 1

If an economy has perfect income equality, explicitly describe what that economy's Lorenz Curve would look like.

QUESTION 2

Briefly describe a situation where you believe two workers should have perfect income equality. Briefly describe a situation where you believe it's okay for two workers to experience income inequality.  

QUESTION 3

An economy's Lorenz Curve reveals that an economy's highest income quintile has 65% of the economy's income while the lowest income quintile only has 5% of the economy's income. Solely based on the Lorenz Curve, is this distribution of income fair? Why or why not?

QUESTION 4

To combat income inequality and to generate increased tax revenues to fund expenditures, government officials decide to aggressively increase how progressive income taxes are, so much so that the top income earners are marginally taxed 90% of their income (and while this marginal tax rate may seem oppressive, these top income earners still have more than enough income to satisfy all of their needs and all but the most extravagant of wants - basically, these earners have more than enough money).

Argue why this tax policy is a fair approach to fund government expenditures.

Why might this tax policy fail to achieve its objectives (tax revenues would actually decline as a result)?

Answer 1

Question 1

If the economy’s Lorenz curve would like a straight line as shown in the figure

Question 2

Two workers should have a perfect income equality where there is a perfect economic equality.There is a line of equal distribution

It is ok for two workers to experience income inequality as can see in the below figure where Lorenz curve is drawn.

Question 3

This would be unfair distribution of income as there will be higher inequality as there is unequitable distribution of income i.e Rich will remain rich and poor will remain poor.

Question-4

Tax policy is a fare approach to fund government expenditures as it would not affect the lower and middle class people and efforts would be made by government to help the middle and poor peoples with that income.This would be redestribution of income in the economy.

This tax policy fail to achieve its objectives because it would reduce the incentives of people to earn more as 90% of their income will be taxed.They would rather decide to chose leisure over work and be in the lower income slab so that they won’t be taxed.