Comprehensive Income Tax
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What effects will a comprehensive income tax have on the incentive to work? What is the effect of income tax on the work-leisure choice?
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Solution Summary
The standard presumption in economic theory and the evidence from research is that when people get more income, but their incentives to earn additional income do not increase, at least some will choose to work less. In effect, they will take some of their tax cut in the form of more hours of leisure.
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First, the basic principle of taxes known to date is that it reduces your take home pay. In other words, if you work the same number of hours you earn less for every hour worked. A substitution effect says that since I am getting less money for each hour I work, I should work fewer hours. My reward from work is less, so I substitute away from work towards other things. The income effect says that taxes make me poorer. When people are poorer they "need" to work more to pay for the things they want. Therefore, taxes should make me work harder.
This lumps in low-income workers with high-income workers, quite erroneously. Intuitively, it seems that lower income workers ...
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