Consider an income tax and a head tax,the sizes of which have been set so that the government collects the same amount of money under each tax.Which tax does the consumer prefer?
A) The consumer is indifferent between the two taxes,since he pays the same amount of money under each tax.
B) The consumer prefers the head tax,because it does not lower the relative wage as does the income tax.
C) The consumer prefers the income tax,because it can be avoided by increasing the amount of leisure time consumed.
D) The consumer may prefer either tax,depending on whether the income tax increases or decreases the number of hours of work at the optimum.

Question

Quizplus · Accepted Answer

The consumer prefers the head tax because it does not lower the relative wage as does the income tax. With a head tax, the consumer knows exactly how much they have to pay, regardless of their income or work effort, so there is no disincentive to work more hours or earn more income. In contrast, an income tax reduces the net wage the consumer earns for each additional hour worked, which can discourage them from working as many hours or from seeking higher-paying jobs.

Consider an Income Tax and a Head Tax,the Sizes of Which