A mandatory health insurance plan costs $4,000. One worker earns $24,500 in employment income and $500 in investment income. Another worker earns $48,000 in employment income and $2,000 in investment income. A third worker earns $68,000 in employment income and $7,000 in investment income. A premium-based system would cost each worker $4,000. A wage tax-based system would cost each worker 8.5 percent of wages. An income tax-based system would cost each worker 8 percent of income. For each worker, calculate the cost of the insurance as a share of total income.
Worker 1 Worker 2 Worker 3
E=employment income $24,500 $48,000 $68,000
I= investment income $500 $2,000 $7,000
P=premium cost of insurance $4,000 $4,000 $4,000
Premium % of income= P/(E+I)
W= Wage tax cost of insurance = 0.085xE
wage tax cost % income= W/(E+I)
T= income tax cost = 0.080x(E+I)
Income tax cost as % of income= T/(e+I)
- Which of the payment systems in Exercise 1.3 would impose the larger burden on those with incomes under $25,000: a plan financed via premiums, via the income tax, or via a payroll tax?
- Which of the plns in exercise 1.3 would be fairer?
- Which of the preceding questions can you answer using positive economics? For which of the preceding questions must you use normative economics?