Question

Redistributive philosophies and incentives Consider a society comprised of two people. Bob earns an income of $90,000 per year and Cho earns an income of $20,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Bob's income and give the revenue to Cho. Without any incentive distortion, Bob would retain $67,500 and Cho would end up with $42,500. However, let us assume that since Bob will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25%×$75,000=$18,750 will be owed in taxes. With the redistribution plan, Bob will take home an income of $ . The $18,750 that Bob pays in taxes will be transferred by the government to Cho. Let us assume that since Cho now receives payment from the government, she will not work as many hours and will earn an income from work of only $16,000 instead of her initial $20,000. With the redistribution plan, Cho's total income (including the government payment received) is now $ . Without a redistribution plan, total income in this society is $ . After the redistribution plan is implemented, total income in this society is $ . Therefore, the redistribution plan total income in this society. According to the libertarian political philosophy, the government implement this redistribution plan. Why? The plan benefits Cho, who is the least well off member of society. Total societal utility will increase if the plan is enacted. The government is not entitled to take money away from one person and give it to another.

Answer 1

As Bob decides to work less, Bob will take home an income of $75000- $18750 = $56,250.

Cho also decided not to work as many hours and will earn an income of $16,000. Cho will receive the income from redistribution plan, that will make his total income equal to $34,750.

Without this plan the total income is $110,000. With redistribution plan total income in the society consisting of two people will be $34,750+$56,250= $91,000.

Libertarians strongly value individual freedom, they detest authoritarian society. The plan does benefit Cho a great deal and makes both Bob and Cho reduce their working hours. The government likes to implement this plan as it improves the standard of living of the society, the goods which only one person will demand for, rest of the society will also be able to use and buy it. The social utility will not increase if the plan is enacted as both of them earn less income than when if they were working more. The government can take money away from one person if he is earning much more than what is the required standard of living amount. If Cho does not have the basic income, then Bob is working for nothing as there is no one to buy what he is doing or servicing. There will be illness if Cho is not able to avail basic facilities, which increases the risk of Bob getting sick as well, thereby reducing his income earning potential. Maybe the government can reduce the tax percentage imposition to make Bob work hard and increase Cho's standard of living as well. But there should be a redistribution plan which benefits the society as a whole.