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Chapter 29: Problem 16

If a progressive income tax discourages additional work as income rises, what would a regressive tax do?

Short Answer

Expert verified
Answer: A regressive tax system encourages additional work as income rises because the tax rate decreases with increasing income, making additional work more attractive and financially beneficial for individuals.

Step by step solution

01

Understanding progressive and regressive taxes

Progressive taxes are taxes where the tax rate increases as the taxable income increases. In other words, people with higher incomes pay a larger percentage of their income in taxes. A regressive tax, on the other hand, is a tax where the tax rate decreases as the taxable income increases. This means that people with higher incomes pay a smaller percentage of their income in taxes.
02

Effects of a progressive tax on work

In a progressive tax system, as income rises, individuals face a higher tax rate, which can discourage additional work. The reasoning behind this is that the more a person earns, the more taxes they have to pay, leading to a decrease in the net benefit of working additional hours. This may cause some individuals to prefer leisure over working more hours, as the perceived gain from additional work is reduced due to higher taxes.
03

Effects of a regressive tax on work

In a regressive tax system, as income rises, individuals face a lower tax rate, which can encourage additional work. This is because the more a person earns, the less taxes they have to pay as a percentage of their income. The net benefit of working additional hours increases as the tax burden lessens, which may motivate individuals to work more hours instead of choosing leisure. In conclusion, a regressive tax system would encourage additional work as income rises because the tax rate decreases with increasing income, making additional work more attractive and financially beneficial for individuals.

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Most popular questions from this chapter

What could account for a backward-bending labor supply curve?

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