Contrast the implications of these two different tax options

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Reference no: EM131001098

Consider a small modification to the one period labor supply problem that we studied in class. Specifically, assume that the individual seeks to maximize utility, U(C) + V(Leisure) subject to the budget equation PC = W L + D. The only new element in this problem is D, which represents dividend income that the individual receives. The government is going to institute some taxes, and is considering two different options. Option one is a proportional tax on labor income, i.e., a tax on labor income at rate τL. The second option is a proportional tax on dividend income, i.e., a tax on dividend income at rate τD. Assume that whichever option is chosen, the tax rate will be set so as to raise the same amount of revenue from this individual. Contrast the implications of these two different tax options for the choices of C and L that the individual makes. In answering this question assume that the values of P, w, and D are not affected by the tax plan.

Reference no: EM131001098

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