why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less earn less, and pay less income taxes under the same circumstances
Because leisure is a normal good.
If you cut income taxes, then the after-tax income for each hour worked goes up. This effect alone should cause a person to want to work more. This is the direct substitution effect labor-for-leisure.
However, leisure is a desireable thing. For some, if after-tax income goes up one thing they may want to purchase is more leisure. Thsi effect causes a person to want to work less. This is the income effect. If the income effect > substitution effect, then the person works less.
With respect to work incentives, studies indicate that decreases in tax rates lead some people to work more but lead others to work less. Those who work more are enticed by the higher after tax pay; they substitute work for leisure because of the opportunity cost of leisure has increased. But other people work less because of the higher after tax pay; enables they to, “Buy more leisure.” With the tax cut, they can earn the same level of after tax income as before with fewer work hours.
The difference in behavior and outcomes between two individuals with different responses to a tax rate cut can be attributed to several factors. Keep in mind that individual circumstances, preferences, and economic incentives can shape their decisions. Here are some possible reasons:
1. Income Elasticity of Work: Everyone has a different level of responsiveness to changes in tax rates. Some individuals may be highly motivated by financial incentives and are willing to work more to take advantage of a lower tax burden. Others may be less responsive and may not alter their work behavior significantly.
2. Marginal Utility of Leisure: People have different preferences and valuations for leisure time versus earning additional income. If someone highly values free time, they might choose to work less even if taxes are reduced. In contrast, individuals who highly prioritize earning money may be more motivated to work longer hours despite the tax savings.
3. Career Choices: Certain professions, such as high-wage jobs that require more effort, expertise, or longer hours, tend to attract individuals motivated by financial gains. Lowering tax rates might incentivize these individuals to work more. However, some lower-paying jobs may not provide the same level of financial motivation, leading to fewer hours worked despite tax cuts.
4. Wealth Distribution: Income inequality plays a role as well. Individuals with higher incomes generally have more financial flexibility and can afford to work less without significant consequences. On the other hand, those with lower incomes may be more financially constrained and unable to reduce their working hours even with tax rate reductions.
It is important to note that these are general observations and there can be exceptions or combinations of these factors. Individual decisions are influenced by unique circumstances and personal choices.