1.(42points) In his influential work on the impact of taxes on labor supply, Jerry Hausman assumed desired (or optimal) annual hours followed this formula:.(Note: I am not going to make you derive thisformula—it comes from a somewhat complicated mathematical formula for the utility function, so just trust me that this is correct.) Assume a two-bracket tax on annual earned income: the first $15,000 of earnings are taxed at a 10% marginal rate, with earnings above $15,000 taxed at a 30% marginal rate. Unearned income is not taxed. Assume $1,000 of unearned income and a gross wage of $20/hour.a.(6 pts) Draw the annual budget constraint for an individual with these tax and economic parameters. Carefully label all points and slopes.b.(6 pts) Calculate and report the virtual income for each budget-set segment.c.Calculate the utility-maximizing hours of labor supplied and indicate where on the budget constraint you drew in part #a the person locates for each of the following individuals:i.(2 pts) An individual with and . ii.(2 pts) An individual with and . iii.(2 pts) An individual with and . iv.(2 pts) An individual with and . d.(6pts) In an effort to cut taxes paid for lower-income individuals, the government decides to increase the size of the bottom tax bracket from $15,000 to $25,000. Draw the new annual budget constraint. Carefully label all points and slopes.e.(8 pts) For each of the individuals in part #c, describe theoretically the impact of the tax change in part #d on their labor supply. f.(8 pts) For each of the individuals in part #c, calculate how increase in the bracket in part #d changed their actual labor supply and indicate where on the budget constraint you drew in part #d the person now locates.2.(28points) In 2017, President Trumpand Congress cut the top federal marginal tax rate from 40% to 25%. Recent estimates in the empirical literature in public economics suggestan uncompensated elasticity of labor supply with respect to the net wage of 1and a compensated elasticity of 0.50 for married secondary earners. Assume that the typical married secondary earner falling into the top federal tax *(1 )Hwyaqb=-+50a=0.50b=-50a=1b=-100a=0.10b=-50a=0.10b=-
2bracket would earn $50 per hour and work 2,000 hours in the absence of the income tax. a.(4pts) Briefly describe in words the substitution effect on labor supply for an individual in the top bracket from the reduction in the marginal taxrate from 40% to 25%.b.(4pts) Briefly describe in words the income effect on labor supply for an individual in the top bracket from the reduction in the marginal tax rate from 40% to 25%.c.(4pts) Calculate the deadweight loss for a typical married secondary earner facing the top bracket rate under the pre-Trump tax law.d.(6pts) Based on the principles of deadweight weight loss, brieflyexplain how you would expect the deadweight loss for a typical married secondary earner facing the top bracket rate to change after vs. beforethe tax law was enacted.e.(4pts) In practice, calculate how much the deadweight loss changed for a typical married secondary earner facing the top bracket rate under the post-Trump tax law.f.Based on theclass lectures, what are the best estimates of the average deadweight loss from thetaxation of earned income in the United States fori.(3pts) Primary earners (traditionally, men)?ii.(3pts) Secondary earners (traditionally, women)?
