Answer to Question #65360 in Microeconomics for Melissa Edgerton
A newly-elected politician has proposed revenue-neutral tax reforms that would benefit highearning households (those with annual incomes above $1,000,000) by a total of $2.13 billion, & at the same time would eliminate a total of $1.84 billion in tax credits that had been provided to low-earning households (those with annual incomes below $30,000). The difference between these figures ($290 million) represents the amount that would otherwise be lost due to additional distortions created by the old tax policy (nobody received this $290 million under the old policy; it was simply lost), & the $2.13 billion benefit to the rich and $1.84 billion cost to the poor are the only effects of this proposal. What must be true in order for this proposal (repealing the old policy) to not be worthwhile from a social perspective? In other words: under what circumstances, if any, should the proposal not be implemented? (there will be a calculation involved here & be sure to address both efficiency and equity in your answer.)
The proposal should not be implemented, if this increase in the gap between the incomes of rich and poor will cause the further increase in this gap or if there is a possibility to save that $290 million under the old policy.