What is the total tax revenue from a tax rate of t

Reference no: EM13220953

Consider a worker who is paid a wage of $20 per hour. The worker has a disutility h^2 of working h hours. Assume that the worker faces a tax rate t. Thus, his net (after-tax wage rate is $20 (1 - t)).

(i) How many hours will the worker work if his objective is to maximize net income minus disutility of work, i.e., he wants to maximize 20(1-t)h-h^2.

(ii) Given your answer to part (i), what is the total tax revenue from a tax rate of t?

(iii) Suppose that the initial tax rate is t1 = 0:7. Consider a tax reform that reduces t to t2 = 0:6. What is the change in revenue following the change from t1 to t2?

Reference no: EM13220953

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