Question

Assume the income tax system for a country follows the basic rules: An individual can earn up to £20,000 tax free, income between £20,000 and £35,000 is taxed at 20% and income over £35,000 is subject to 40% tax. a) Show how this is reflected in the budget line underlying a consumer's labour supply choice. b) Suppose the highest earner earns £50,000. Explain how a zero marginal tax rate applied to income above £50,000 would affect welfare in the population and tax revenue collected.

Answer 1