3. Republicans often argue that high taxes reduce the incentive to work. In fact a group of economists called supply-siders believe that if the top income tax rates are reduced existing workers will work more hours, generate more output, and the government could conceivably collect more revenue (a smaller percentage of a larger base). For this to be true which effect must dominate labor supply for high wage workers (or people married to high wage workers)? Tell me something about workers for whom this is likely to be the case.

b. If instead the supply-siders argue that lower income taxes would increase labor force participation why is this statement less controversial?

c. Show the effect of lowered taxes on labor force participation graphically. (i.e. draw an indifference curve and budget constraint where the individual was currently not in labor force and the tax cut caused her to work) [Hint is it helpful to give some nonlabor income.]

Answer rating: 100% (QA)

a For the supplyside argument about highincome workers the dominant effect must be the income effect ... View the full answer