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Assume that a country has a simple tax structure, in which all income over $10,000 is taxed at 20 percent. Evaluate a proposal to increase the progressivity of the tax structure by requiring all those with incomes over $100,000 to pay a tax of 80 percent on income in excess of $100,000. Draw a high-wage earner's budget constraint. How does the surtax affect her budget constraint? What happens to her incentives to work? Is it possible that imposing the tax actually will reduce the tax revenues the government receives from the rich?

Microeconomics, Economics

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