Answer to Question #266175 in Macroeconomics for Sad

Question

Illustrate and carefully explain the impact of an increase in the income tax rate

from 25 percent to 35 percent on the demand for labour, supply of labour,

equilibrium wage and level of employment.

Answer 1

The 10% increase in income tax rate reduces the quantity of labor traded. The wage paid by the firm is higher than the wage in the original equilibrium, and the wage that the worker receives is less than the original equilibrium wage.

The increase in income tax also reduces incentives for those who are unemployed to look for jobs and also those who are employed to work longer. It also discourages potential and existing employers from hiring.