Consider a society comprised of two people. Andrew earns an income of $115,000 per year and Beth earns an income of $30,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Andrew’s income and give the revenue to Beth.
Without any incentive distortion, Andrew would retain $86,250 and Beth would end up with $58,750. However, let us assume that since Andrew will not receive all the income he earns, he decides to work less and earn an income of only $105,000, of which 25%×$105,000=$26,250
will be owed in taxes.
With the redistribution plan, Andrew will take home an income of.
The $26,250 that Andrew pays in taxes will be transferred by the government to Beth. Let us assume that since Beth now receives payment from the government, she will not work as many hours and will earn an income from work of only $29,000 instead of her initial $30,000.
With the redistribution plan, Beth’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 utilitarian political philosophy, the $26,250 transferred from Andrew to Beth will benefit Beth than it hurts Andrew. Which of the following statements is true according to this philosophy?
The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss.
The government should not institute the plan because it has no right to take money from one person and give it to another.
The government should definitely institute the plan because it will increase overall utility.