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Explain why a reduction in welfare benefits for the poor and a tax increase on the...

Explain why a reduction in welfare benefits for the poor and a tax increase on the wealthy would have different effects on work effort.
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Answer #1

Reduction in welfare benefits for poor will decrease the level of work effort.

People earn wage and get welfare benefits. This implies that even if people lost their job they will not suffer much because of welfare benefits. This discourages workers to put more efforts. When this benefit reduces people start valuing their jobs more and will put more efforts in order not to lose it.

A tax increase on wealthy will lead to decrease in work efforts. Wealthy people have wealth which does not depend on wage rate. When tax increases their net disposable income falls, that is return from job falls. This discourages workers to put in higher work efforts as they are already wealthy.

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