Question

Rebecca is a policy-maker and she wants to design a fair income taxation system, based on the principle that effort should be rewarded, while economic gains coming from advantages not earned through effort should be redistributed. In other words, she wants to level the playing field. In her world, people only differ in their ability to pay and are otherwise identical. Assume that income is a good proxy for ability (to pay). This assumption implies that high earners have high ability. Assume also that ability is randomly given to each individual at birth and that it remains constant over time. Would Rebecca design a system in which high-earners are taxed more or are taxed less than low-earners? Why?

Answer 1

Rebecca wants to design a fair income tax system.

In her world, high earning is a result of high ability. If a person has earned through means other than effort, such income should be redistributed. Since abilities are randomly assigned, there is no foul play here.

In her world, high-earners would be those people who have worked really hard and have earned through their efforts. Such people should be taxed less, and should be motivated to work harder.

Low earners who have not made proper efforts, but got money through other means, should be taxed more. This will give them the incentive to work harder and earn more, rather than do nothing at all.

In Rebecca's world, there must be a proper system to measure effort actually exerted, and the economic output thus generated.