Author Question: An increase in unearned income always creates a disincentive to work. Indicate whether the ... (Read 56 times)

Lisaclaire · **on:** Jul 1, 2018

An increase in unearned income always creates a disincentive to work.

Indicate whether the statement is true or false

Question 2

A tax cut will unambiguously lower income-tax revenue.

Indicate whether the statement is true or false

ultraflyy23 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

False. The effect on labor supply will also depend on the individual's preferences towards work (leisure).

Answer to Question 2

False. It depends on how the quantity of labor supplied responds to the increase in the after-tax wage rate. If the income effect dominates, the quantity of labor supplied falls and so will tax revenue. If the substitution effect dominates, the quantity of labor supplied increases, and income-tax revenue could increase. This is a function of whether the after-tax wage was low already because the tax rate was relatively high.