Question

Paraphrase below please!

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A higher income guarantee with a higher reduction rate is more likely to discourage work for two reasons. First, not working at all yields a higher income. Second, a person is allowed to keep much less of his or her earned income when the effective tax rate is 75%. Thus, program in part (b) is more likely to discourage work.

Answer 1

A higher income guarantee brings income effect that causes the person to spend more time on leisure and less time upon the work. As a result, individuals do fewer hours of work after the higher income guarantee. Further, the higher deduction of 75%, will discourage people to work as only 25% of their efforts will revert back to them, causing discouragement to work. So, these two policies of higher income guarantee and higher deductions, will lead to discouragement of work by the individuals.