City College of San Francisco Optimal Income Taxation & Budget Constraint Paper Problem 2: Optimal Income Taxation Consider an economy with two agents who

City College of San Francisco Optimal Income Taxation & Budget Constraint Paper Problem 2: Optimal Income Taxation

Consider an economy with two agents who differ in their innate earning

ability, denoted by w and w for the high-ability individual and the lowability

individual, respectively, where w > w ³ 0. Both individuals share

the same preferences given by U(c,l) = c -l2 / 2, where c denotes

consumption and l denotes labor (the price of c is normalized to 1).

Income is subject to a proportional income tax denoted by 0 < t <1. Moreover, the government is enacting a supplementary-security-income policy (SSI) according to which, any individual whose (net) income is Problem 2: Optimal Income Taxation Consider an economy with two agents who differ in their innate earning ability, denoted by w and w for the high-ability individual and the low- ability individual, respectively, where w> w20. Both individuals share
the same preferences given by U(0,1)=c-l? /2, where c denotes
consumption and I denotes labor (the price of c is normalized to 1).
Income is subject to a proportional income tax denoted by 0
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