Consider a tax system as follows. The tax rate for income between 0 and $1,000 is 25%. Any additional income
above $1,000 is taxed at 70%.
Now think of an individual who makes $100 an hour and has a utility function:
u(c, 100-l) = ln(c) + 2ln(100-l)

(a) Compute how many hours a week would this individual work. What is the fiscal revenue?
(b) Now consider a fiscal reform that lowers the highest marginal tax to 60%. What is the impact on hours worked?
What is the impact on fiscal revenues?

Answer rating: 100% (QA)

a Given Tax rate for income 0 1000 25 Tax rate for income above 1000 70 Wage rate 100hour Utility fu... View the full answer