![]() This means that the incentive to work is not represented by a value for hourly earnings that is fixed to the individual and independent of their work choice. ![]() The problem posed for researchers measuring the effect of income taxes on labor supply is that, in most income tax systems, tax rates change with income (which, in turn, changes with work hours) so that the net wage rate varies as an individual alters his work hours. If each individual responds to net wage rates and net nonlabor income, then the relevant budget constraint involves the post-tax variables: p w and net or post-tax nonlabor income is y n=(1− t).If t is the tax rate, w represents gross (that is, pre-tax) hourly earnings, and y is gross (pre-tax) nonlabor income, then net or post-tax wages are defined as w n=(1− t) One aspect of labor supply research that has occupied a large amount of attention is the impact of income taxation on work behavior. Pencavel, in International Encyclopedia of the Social & Behavioral Sciences, 2001 5.1 Labor Supply and Taxes
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