Why is the budget line straight? What would it look like if overtime were paid at higher rates per hour? What will the budget line look like for a person with higher qualifications?

Redraw diagram (b), but this time do it in such a way that the income effect outweighs the substitution effect.

Try drawing two or three diagrams like diagram (c), with the tangency point at different points along the budget line to the left of q. You will find that the further to the left you move, the less likely is the substitution effect to outweigh the income effect, i.e. the more likely are people to work less when given a tax cut.

Will people actually on the old tax threshold (i.e. those whose indifference curve/budget line tangency point is at t) work more or less? Try drawing it.

All the above analysis assumes that taxes will not affect people’s gross wage rates. If part of the incidence of taxes is borne by the employer, after-tax wages will be affected less. There will therefore be a smaller shift in the budget line. How will this affect the argument for tax cuts?