Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor

Business Dec 27, 2020

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth:

a) Is more efficient and more equal for society,

b) Is more efficient but less equal for society,

c) Is more equal but less efficient for society,

d) Is less equal and less efficient for society.

Expert Solution

Answer: C

By taxing the wealthy, you decrease their incentives to work which are already more sensitive than their lower income counterparts due to the large negative income effect. This reduces efficiency in the economy but increases equality by reducing the wages of the wealthy and giving it to those with lower incomes.

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