Question

The government decides to reduce income taxes for workers. Why does this increase employment?

a) It gives a higher incentive to work
b) It becomes cheaper to employ workers
c) Investments are cheaper
d) It increases the quality of labour

Answer 1

When tax on workers reduces, they are left with higher disposable income. This gives them a higher incentive to work because if they work more, they might pay the same amount of taxes as before but have higher disposable income with them. This will also bring those out of the workforce, back into it. So all these resons will shift the labour supply curve towards the right. If enough demand is there, it will increase employment. So option a is correct.

It is not cheaper to employ workers, the tax they pay is from their own income and they pay it to the government. The employer has no say in that. Until and unless he reduces the wage rate, it will not impact the cost of employment. So option b is incorrect.

Investments depend on the cost of borrowing capital so it is not impacted by the tax on labour. So option c is incorrect.

Reduced taxes bring in more lowskilled workers, because high skill workers are not much impacted by the reduction of the tax as their wage rate is very high. So quality may or may not increase. So option D is incorrect.