Answer to Question #88060 in Microeconomics for Nathalie

Question

A new government has been elected, largely on the platform of im- plementing a tax cut on top bracket earners with income above the threshold zT . They argued during the election campaign that this tax cut will stimulate the economy and will actually increase government revenue as a result. Everybody wins!
(a) Write down an expression for the average per person tax revenue generated from the top bracket. Define any variables you need.
(b) Determine an expression for the change in average per person revenue associated with a decrease in the top marginal tax rate as a function of the net-of-tax elasticity of taxable income (i.e., the elasticity with respect to (1 − t)). Show all of your work and explain intuitively what the expression means.

Answer 1

(a) The average per person tax revenue generated from the top bracket will decrease comparing with previous tax policy.

(b) The change in average per person revenue associated with a decrease in the top marginal tax rate will be positive.