Suppose that you are responsible for proposing an income red

Suppose that you are responsible for proposing an income redistribution program to the Ontario Minister of Finance. You have compiled the following analysis on the current division of wealth among the two major stakeholder groups in question (rich and poor). Your analysis depicts the current Pareto optimal allocation (E) resulting from the initial endowments (w) YPoor EP E1 ICA1 XPoor OPoor Price Ratio ICB YRich a) If the social goal is to redistribute income between the rich and poor such that prices will lead to an allocation at E2 then suggest a taxation method to achieve this goal without any loss in efficiency. Complete your diagram above to include your taxation method that will achieve the allocation at E2. [2 points] b) What are the conditions that must be present for your taxation method to be viable? [1 point]

Solution

a) A feasible solution in the short run would be a progressive tax system with transfer payments like disability/unemployment benefit and subsidies. By taxing lower income groups less than higer-income groups, the income can be redistributed from rich to poor .But a suitable policy in the long run would be to increase the access to healthcare, college education and improving macroeconomic indicators like unemployment and inflation or crude oil prices which could directly or indirectly create more jobs and decreases corruption. It may make sure that all individuals be it poor or rich will have the opportunity to grow , advance and collate wealth regardless of their humble beginning in life.

b) Conditions that must be present for a taxation method to be viable., the taxation method should fulfill these basic conditions before redistributing income in the society : transparency , fairness , simplicity, administrative ease and adequacy.

- Adequacy : taxes should provide revenue to meet the basic needs of society.

Simplicity : taxpayers can evade a puzzle of taxes, forms and filing criterias.

Transparency - taxpayers can without any hassle find details about the tax system and how tax money is being used and implemented.  

Administrative ease - tax system shouldnt be too complicated or cost ineffective for either tax collectors and tax payers