Self-employed workers in the United States must pay Social Security taxes equal to \(12.4 \%\) of any income up to \(\$ 147,000\) in 2022 . This income level of \(\$ 147,000\) is known as the "cap." Income in excess of the cap is not subject to Social Security tax, so self-employed workers with incomes exceeding \(\$ 147,000\) pay \(\$ 147,000 \times 0.124=\$ 18,228\). Now consider two proposals designed to increase Social Security tax revenue. Proposal A increases the cap to \(\$ 177,822.60\) so that Social Security taxes equal \(12.4 \%\) of income up to \(\$ 177,822.60\). Proposal B increases the Social Security tax rate to \(15 \%\), but leaves the cap unchanged at \(\$ 147,000\).

For people with income that always exceeds the cap, the amount of Social Security tax is the same under Proposal A \((\$ 177,822.60 \times 0.124=\$ 22,050)\) as under Proposal B \((\$ 147,000 \times 0.15=\$ 22,050)\). There are no planned changes in future Social Security benefits anticipated by current workers.

a. Sally is self-employed and earns \(\$ 200,000\) per year. What are the effects of Proposal A and Proposal B on Sally's labor supply? Under which proposal would she supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.

b. Fred is self-employed and earns \(\$ 50,000\) per year. What are the effects of Proposal A and Proposal B on Fred's labor supply? Under which proposal would he supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.