Question

Chapter 20

Scenario - Suppose that a society is made up of five families whose incomes are as follows:  

$120,000; $90,000; $30,000; $30,000; and $18,000.

The federal government is considering two potential income tax plans:

Plan A is a negative income tax plan where the taxes owed equal 1/3 of income minus $20,000.

Plan B is a two-tiered plan where families earning less than $35,000 pay no income tax and families earning more than $35,000 pay 10% of their income in taxes. The income tax revenue collected from those families earning over

$35,000 is then redistributed equally to those families earning less than $35,000.

1. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of utilitarianism prefer?

2. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of liberalism prefer?

3. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of libertarianism prefer?

Answer 1

Plan A:

Family 1- 120000/3 - 20000 = 20000

Family 2- 30000 - 20000 = 10000

Famiy 3- 10000- 20000 = -10000

Family 4- 10000 - 20000 = -10000

Family 5- 6000 - 20000 = -14000

Total = - 4000

Plan B:

Family 1- 120000*10% = 12000

Family 2- 90000*10% = 9000

Famiy 3- No tax

Family 4- No tax

Family 5- No Tax

12000 + 9000 = 21000 is equally distributed to reamaining three families i.e 7000 to each family.

Utilitarianism: It is a theory which promotes overall happiness and do not cause unhappiness or harm. It aims for the betterment of the society.

Liberalism: In this, the decisions are taken by the individual instead of institutions or organizations. Liberals tend to oppose government intervention in the free market.

Libertarians try to get maximize political freedom. They value individual freedom.

a.) Plan A

b.) Plan A

c.) neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy.