Assume an income tax was doubled. Describe what would happen to labor supply and leisure. Can we be about the net effect on labor supply?
What will be an ideal response?
The doubling of the income tax is going to cause individuals to substitute away from the taxed activity, i.e., earning income. Thus the substitution effect of the tax is going to be decreasing labor supply and increasing leisure. The decline in after-tax income, however, is likely to cause the person to work more to make up some of the after-tax income lost from the new tax. Depending upon how large the income effect is the number of hours worked after the tax could actually increase. Since the income effect could dominate the substitution effect, we cannot be sure that the doubling of the income tax would reduce labor supply.
You might also like to view...
In the above figure, the total producer surplus at the efficient level of output is ________
A) $4.5 million B) $9.0 million C) $2.5 million D) $3.0 million
Assume that in an effort to help consumers, the government decides to reduce the amount of taxes it imposes on sellers of gasoline, that is, sellers are required to pay the government a smaller fee for each gallon of gas they sell
In the market for gas, this would have the effect of causing an increase in the supply of gas and a decrease in equilibrium price. Indicate whether the statement is true or false