Consider a society consisting of two people. Hubert earns an income of $120,000 per year and Kate earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 20% tax on Hubert's income and give the revenue to Kate. Without any incentive distortion, Hubert would retain $96,000 and Kate would end up with $49,000. However, let us assume that since Hubert will not receive all the income he earns, he decides to work less and earn an income of only $110,000, of which 20% x $110,000 = $22,000 will be owed in taxes.
With the redistribution plan, Hubert will take home an income of $.
The $22,000 that Hubert pays in taxes will be transferred by the government to Kate. Let us assume that since Kate now receives payment from the government, she will not work as many hours and will earn an income from work of only $24,000 instead of her initial $25,000.
With the redistribution plan, Kate's total income (including the government payment received) is now $.
Without a redistribution plan, total income in this society is $. After the redistribution plan is implemented, total income in this society is $. Therefore, the redistribution plan total income in this society.
According to the utilitarian political philosophy, the $22,000 transferred from Hubert to Kate will benefit Kate than it hurts Hubert. Which of the following statements is true according to this philosophy?
The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss.
The government should definitely institute the plan because it will increase overall utility.
The government should not institute the plan because it has no right to take money from one person and give it to another.