Question

Q10-11. Suppose the government replaces a flat wage tax with a progressive tax, in which a person’s first $20,000 of income is not taxed at all and any income they earn above $20,000 is taxed at a rate of 40 percent.

Q10. Will an individual who have income below $20,000 per year work more, less, or the same after the law goes into effect?
(a) Increase (b) Decrease (c) Uncertain (d) No effect

Q11. Will an individual who earn above $20,000 per year work more, less, or the same after the law goes into effect?
(a) Increase (b) Decrease (c) Uncertain (d) No effect

Answer 1

Q10 option (d) is correct

Under progressive tax,

• An individual with an income below $20000 will work the same because he is not getting taxed on his income Hence no effect option (d) is correct

Q11)

Answer : option (c) is correct

• When income is above $20,000, if income effect is stronger than substitution effect, In this case supply curve of labor ia upward rising because worker will increase working hours and will work more to earn more post-tax income. After threshold labor hours, substitution effect becomes stronger than income effect. In this case supply curve becomes backward bending because worker will reduce working hours and substitute leisuee for work therefore will work less. Hence effect of the progressive tax system is uncertain. (Option c is correct )

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