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Taxation and Redistribution Assignment
Taxation and Redistribution Paper
Utility interdependence occurs when an individual’s level of consumption is dependent on another individual’s utility function. In such instances, free-rider problem is likely to arise, particularly when there is private charity in play (Warr, 1982). Ideally, when fiscal redistribution is moving on upward trajectory— especially in cases of private charity, then it becomes impossible to achieve or improve the Paretian. Practically, donors will have to respond to the rising fiscal redistribution by cutting down on their voluntary benefactions by a dollar for every dollar transferred (Golosov et al., 2012). In that sense, net transfer cannot be achieved except when pursuance of incremental fiscal redistribution occurs at the point where private contributions have been reduced to zero. Similarly, net transfer can be attained by employing fiscal mechanisms that that stimulate donor’s incentive to donate (Tuomal, 2016). In reality, incorporating lump-sum tax on donations only determines marginal fiscal transfer, not total transfer.
When there is zero net transfer (first phase), taxing donors when their donations are positive induce them to reduce their voluntary benefactions by the amount of tax in pursuit of reestablishing equilibrium marginal point. Neither the donor nor the recipient is made better off (Warr, 1982). Even after increasing the tax nothing will change until the charitable donations of a donor is reduced to zero. On the other hand, when all charitable donations have been reduced to zero (third phase), there will be a correspondence of two-dollar net transfer to the recipient. However, when one donor’s benefaction is zero while the other is positive, a fraction of dollar will be transferred to the recipient. Another way of reaching pareto optimum is by applying tax and subsidy uniformly across donors, which ensures that “zero aggregate revenue” is attained (Aronsson et al., 2016). However, this solution will not implicitly make donors gain relative to their original position. In fact, it will not be pareto superior compared to the equilibrium under charity. ................GET A PLAGIARISM FREE COPY