Scenario 20-1 Suppose That a Society Is Made Up of Five Families

question 187

Multiple Choice

Scenario 20-1
Suppose that a society is made up of five families whose incomes are as follows:
$120,000; $90,000; $30,000; $30,000; and $18,000.
The federal government is considering two potential income tax plans:
Plan A is a negative income tax plan where the taxes owed equal 1/3 of income minus $20,000.
Plan B is a two-tiered plan where families earning less than $35,000 pay no income tax and families earning more than $35,000 pay 10% of their income in taxes. The income tax revenue collected from those families earning over $35,000 is then redistributed equally to those families earning less than $35,000.
-Refer to Scenario 20-1.Assuming that utility is directly proportional to the cash value of after-tax income,which government policy would an advocate of libertarianism prefer?

• A) Plan A
• B) Plan B
• C) either Plan A or Plan B
• D) neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy

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Definitions:

Equity Method

An accounting technique used by companies to assess their investments in other companies, recognizing income and changes in investment value proportionate to ownership level.

Consolidated Balance Sheet

A financial statement that aggregates the financial position of a parent company and its subsidiaries, presenting it as one single entity.

Consolidation Elimination

The process of removing internal transactions and balances between entities within a single group to prepare consolidated financial statements.

Equity Method

An accounting technique used to record investments in affiliate companies where the investor has significant influence but not full control, typically between 20% and 50% ownership.