Question

In: Economics

Assume a proportional tax is imposed on wage. Given that the amount of tax revenue remains...

Assume a proportional tax is imposed on wage. Given that the amount of tax revenue remains constant, the government plans to stop imposing a proportional tax in favour of a lump sum tax on wage in order to increase labour supply. Can the government achieve its goal? Use a diagram to show the effects.

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Expert Solution

Definition: Proportional tax is the taxing mechanism in which the taxing authority charges the same rate of tax from each taxpayer, irrespective of income. This means that lower class, or middle class, or upper class people pay the same amount of tax. Since the tax is charged at a flat rate for everyone, whether earning higher income or lower income, it is also called flat tax.   Description: Proportional tax is based on the theory that since everybody is equal, taxes should also be charged the same way.

It is unfair to charge more from anybody having a higher income. The government charges a flat rate of 30% on the income earned by the companies in India, exclusive of surcharge and educational cess. A surcharge of 10% and a cess of (2%+ SHEC 1%) are collected on the tax amount collected .   a) To specify an indifference curve, we hold utility constant at ¯u. Next, rearrange in the form:
C =

b

a
b
l
Indifference curves are, therefore, linear with slope, −a/b, which represents the marginal rate of substitution.
There are two main cases, according to whether (a/b) > w or (a/b) < w. The first panel of Figure 1 shows
the case of (a/b) < w. In this case, the indifference curves are flatter than the budget line and the consumer
picks point A, at which l = 0 and C = wh + π − T . The bottom panel of Figure 1 shows the case of
(a/b) > w. In this case, the indifference curves are steeper than the budget line, and the consumer picks
point B, at which l = h and C = π − T. In the coincidental case in which (a/b) = w, the highest attainable
indifference curve coincides with the budget line, and the consumer is indifferent among all possible amounts
of leisure and hours worked.
Figure 1: Perfect substitutes.
b) The utility function in this problem does not obey the property that the consumer prefers diversity, and
is, therefore, not a likely possibility.
c) This utility function does have the property that more is preferred to less. However, the marginal rate
of substitution is constant, and, therefore, this utility function does not satisfy the property of diminishing
marginal rate of substitution.

A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that generates negative externalities (costs not included in the market price). The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product.[1] Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drinkconsumption.[2]

In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of a Pigovian subsidy to make the users pay for the extra benefit and spur more production.[3]An example sometimes cited is a subsidy for provision of flu vaccine.[4]

Pigovian taxes are named after English economist Arthur Pigou (1877–1959) who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics in 1972. Thanks sir for chosen me.please like it.


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