In a model where a continuum of individuals have preferences for consumption and leisure as follows
wi = ci + ln(xi)
and individuals differ in their labour endowments ei, suppose two candidates run for office and offer a platform of imposing a proportional tax rate τ to finance lump sum transfers uniformly to all the population.
- Find taxes that arise at a median voter eqm
- Check whether eqm taxes maximize f.
- Compare eqm with the "planner's solution"
Where the planner maximizes the average individual's welfare. Are taxes higher or lower at the median voter solution? Why?