(20 points) Currently, Alaska has no state income tax. One option being considered by the governor, Bill Walker, is to close the state budget deficit by instituting a 7.5% proportional tax on labor income. There are 283,000 households in Alaska, and current average household labor income is $61,000.
a. (10 pts) Calculate the deadweight loss of this tax, assuming an uncompensated labor supply elasticity of 0.25.
b. (5 pts) Is your estimate of the deadweight loss in part a. an accurate measure? Why or why not? If you believe it to be inaccurate, is it an underestimate or an overestimate of the true deadweight loss? Be sure to buttress your answers with economic reasoning.
c. (4 pts) What is the average deadweight loss?
d. (1 pt) What is the marginal deadweight loss?
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