Posted by **Derek** on Wednesday, October 8, 2008 at 1:22pm.

The Lump Sum Principle In the 1980s Margaret Thatcher

was the British Prime Minister. She was very popular and eective until

she pushed for the idea of a so called lump-sum tax. The lump-sum tax is

one in which every citizen pays a single xed payment.

Consider the scenario, in which a consumer chooses consumption and

the fraction of the day she works subject to income constraints, given taxes

and prices p;w. Let non-labor income be I and suppose the consumers

preferences are given by:

u(c; l) = c:5(1 l):5 (1)

(a.) Set up the maximization problem assuming a proportional tax, T (i.e.

at tax, T constant, : : :, the one we did in class)

b.) Set up the maximization problem assuming a lump-sum tax, S.

c.) Suppose that the government must raise G < I pounds. (That is

wTl = G or S = G) Show that the consumer's utility is higher under

the lump-sum tax regime than it is under the

at tax regime(Plug in

numbers for everything but c and l if you want.

- college-Intermediate Microeconomics -
**economyst**, Wednesday, October 8, 2008 at 2:02pm
First, I don't understand your utility function; I think the Jiskha site modified or eliminated some "special" characters you may have been using.

Second, I don't see a question.

That said, a proportional income tax should lower the marginal utility from working, while a lump sum tax should have no direct impact on a person's leisure/labor choice.

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