The government is considering raising the tax rate on labor income. Explain the supply-side effects of such an action and use appropriate graphs to show the directions of change, not exact magnitudes. What will happen to: The supply of labor and why? The demand for labor and why? Equilibrium employment and why? The equilibrium before-tax wage rate and why? The equilibrium after-tax wage rate and why? Potential GDP? Explain your response with specifics and provide examples.
The government is considering raising the tax rate on labor income. Explain the supply-side effects of such an action and use appropriate graphs to show the directions of change, not exact magnitudes. What will happen to:
- The supply of labor and why?
- The
demand for labor and why? - Equilibrium employment and why?
- The equilibrium before-tax wage rate and why?
- The equilibrium after-tax wage rate and why?
- Potential
GDP ?
Explain your response with specifics and provide examples.
Higher tax rates on labour income and consumption expenditures contribute to less time spent working in the legal market sector, more time spent working for one's own household, an increase of the informal economy, and smaller employment and output shares for industries that heavily rely on low-wage, low-skill labour inputs. The behavioural effect is the effect that changing behaviour as a result of a tax adjustment would have on tax receipts at the prior tax rates. An increase in taxes would be negative because it would discourage people from working, which would lower tax revenue.
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