Scenario 20-3
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.
-Refer to Scenario 20-3. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of liberalism prefer?
A)Plan A
B)Plan B
C)either Plan A or Plan B
D)neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy

Question

Quizplus · Accepted Answer

Plan A is a negative income tax plan that would provide a cash transfer to the poorest families in society. This would increase their after-tax income and, therefore, their utility.

Scenario 20-3 Suppose That a Society Is Made Up of Five Families