Consider a government that imposes a personal income tax. It is estimated that the tax will...

Consider a government that imposes a personal income tax. It is estimated that the tax will not affect total labour supplied in the economy. Given this, the political party advocating for the tax argue that the tax acts as a non-distortionary, lump-sum tax, and as such imposes no excess burden. Is this a reasonable argument?

Expert Solution

Given that the labour supplied in the economy remains constant the imposition of personable income tax is a regressive step.

It is not a reasonable argument, as this will reduce the personal disposable income with the public and thus reduce spending in the economy. This reduction in consumption expenditure will have a negative impact and can lead to rise in unemployement level. This will also hamper the private investment in the economy that will subsequently lead to job loss.

Rahul Sunny answered 2 years ago

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Consider a government that imposes a personal income tax. It is estimated that the tax will...

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