You graduate from college and take a job at a consulting firm with a wage of $25/hour. Your job is extremely flexible: you can choose to work any number of hours from 0 to 2,000 per year.
a. Suppose there is an income tax of the following form: Income up to $10,000: no tax Income from $10,000 to $30,000: 20% tax rate Income from $30,000 up 30% tax rate Draw your budget constraint with the tax and under a policy of no taxes. With the tax system in place, are there any points that you are particularly unlikely to choose? Why or why not?
b. Say that you choose to work 1,500 hours per year. What is your marginal tax rate? What is your average tax rate? Do these rates differ? Why or why not?
c. Suppose that the two tax rates are increased to 25% and 50%. What is the likely effect on the labour supply of the primary earner? What is the likely effect on secondary earners? Explain how the responses might differ between these groups, both in terms of underlying economic effects and in terms of the empirical evidence on labour supply responses.
You graduate from college and take a job at a consulting firm with a wage of $25/hour. Your job is extremely flexible: you can choose to work any number of hours from 0 to 2,000 per year.
a. Suppose there is an income tax of the following form: Income up to $10,000: no tax Income from $10,000 to $30,000: 20% tax rate Income from $30,000 up 30% tax rate Draw your budget constraint with the tax and under a policy of no taxes. With the tax system in place, are there any points that you are particularly unlikely to choose? Why or why not?
b. Say that you choose to work 1,500 hours per year. What is your marginal tax rate? What is your average tax rate? Do these rates differ? Why or why not?
c. Suppose that the two tax rates are increased to 25% and 50%. What is the likely effect on the labour supply of the primary earner? What is the likely effect on secondary earners? Explain how the responses might differ between these groups, both in terms of underlying economic effects and in terms of the empirical evidence on labour supply responses.
