Author Question: Why are there two different views on the effect of taxation on labor supply in the United States? ... (Read 76 times)

urbanoutfitters · **on:** Jun 29, 2018

Why are there two different views on the effect of taxation on labor supply in the United States?

What will be an ideal response?

Question 2

Describe the gaps between real GDP per person in the United States and in other countries. For which countries is the gap narrowing? For which is it widening? For which is it the same?

What will be an ideal response?

deja · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The effect of a tax on labor would depend on the elasticity of labor supply. Early empirical studies found that the Reagan tax cuts of the 1980s led to around a 6 increase in the number of hours workedresulting in a relatively large elasticity estimate. However, when economists used richer data sets to estimate the same elasticity, they found a very small elasticity estimate: most estimates of the elasticity of labor are in the range of 0 to 0.1 . If the supply of labor is relatively elastic, then an increase in income taxes will have a large impact on labor supply. But if labor supply is inelastic, then a tax increase won't cause a big change in the number of hours a worker supplies.

Answer to Question 2

Some rich countries are catching up with the United States, but the gaps between the United States and many poor countries are not closing. Amongst the rich countries, since 1960 Japan has closed the gap with the United States but the gaps between the United States and Canada, and the Europe Big 4 (France, Germany, Italy, and the United Kingdom) have tended to remain constant. Other Western European nations and the former Communist countries of Central Europe have fallen slightly farther behind the United States. The gap between the United States and most nations in Africa, and Central and South America has widened. But some nations in Asia including Hong Kong, Singapore, Korea, and Chinahave grown very rapidly. The gap between these nations and the United States has shrunk; indeed, Singapore has slightly surpassed the United States and Hong Kong has virtually tied the United States.