Microeconomics Assignment

Microeconomics Assignment

The marginal tax rate is the tax that applies to the last dollar of income. President-elect Biden has promised to raise the marginal income tax rate to 40% for incomes above $400,000. That means, for example, that a person with an annual income of $500,000 would pay a 40% tax rate on the last $100,000 of income, and a lower rate on the first $400,000. Presently, the top marginal tax rate is 37% and kicks in at income levels above $500,000.

 

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The assignment:

  • How might the total utility of the country benefit if rich people face a higher marginal tax rate on their income than poor people, as opposed to everyone being taxed at the same rate? What particular economic “law” that we’ve studied applies?

 

  • Opponents argue that higher tax rates would make high-income people cut back on working, and would therefore suppress innovation and job creation. Use the substitution effect and the income effect concepts to analyze how people’s work effort might change with a higher tax rate. An income tax increase would reduce the return from working (the substitution effect) and also reduce people’s income (the income effect). What is the impact of each of these effects on the desire to work? Which effect would have to be stronger in order for work effort to decline?

 

 

 

 

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