Question

6. Rebecca is a policy-maker and she wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed. In other words, she wants to level the playing field. In her world, people only differ in their ability to pay and are otherwise identical. Assume that income is a good proxy for ability (to pay). This assumption implies that high earners have high ability. Assume also that ability is randomly given to each individual at birth and that it remains constant over time. Would Rebecca design a system in which high-earners are taxed more or are taxed less than low-earners? Why?

Answer 1

Rebecca is a policy-maker and she wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed. In other words, she wants to level the playing field. In her world, people only differ in their ability to pay and are otherwise identical.

Rebecca will design a system in which high earners are taxed more, because the ability to pay of a person is decided by their incomes earned and the only difference between the persons is their ability to pay. So if she wants to design a fair income taxation system, she should design such a system in which high earners are taxed high because it is fair to collect higher tax from high earners because it will not effect them much as they have a high ability to pay. This is also because low income earners generally have to give a lot of effort to earn an amount of income to sustain their life but high income earners comparatively have to give less effort to earn same level of income.