economics

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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

  • economics -

    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.

  • economics -

    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.

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