The state of Kansas increased income tax rates for higher income households in 2018. For an...

The state of Kansas increased income tax rates for higher income households in 2018. For an individual with high income living in Kansas (and for whom leisure is a normal good), the higher tax rate they now face:

will have an unambiguously positive effect on his or her desired work hours.

will have an unambiguously negative effect on his or her desired work hours.

will have no effect on his or her desired work hours.

could have a positive, negative, or no effect on his or her desired work hours.

Expert Solution

Soln. With increased income, taxable income will increase and due to increase in income tax rate, individual with higher income has to pay more tax. Increased income is directly proportional to the amount of work being done, which in turn is dependent on the number of hours devoted for work. Higher income acts as an incentive for working extra hours but if the increased income also leads to increase in the tax amount to be paid by an individual then, motive and desire to work more would be reduced. Individual has negative perception that with increased income more taxes need to be paid and hence it is not benefiting them. They think, working more hours would not add value to their income and it is not effective for them to work more hours. With this mind set up, their desire to work more hours get reduced. Hence, option b, which states that "will have an unambiguously negative effect on his or her desired work hours",is the correct option.

Rahul Sunny answered 2 years ago

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