Question

Andrew argues that a tax rate increase will simply cause taxpayers to work more to generate the same after tax dollars as before the tax rate increase. Sally disagrees and believes that taxpayers will engage in more leisure activities since the after tax value of additional work has decreased. The basis of 's argument is the substitution effect, while the basis for 's argument is the income effect.True / False.

Answer 1

The correct answers to the question: The basis of ____´s argument is the substitution effect, while the basis for ___´s argument is the income effect, would be: Sally and then Andrew. Thus, the full answer would be:

The basis of Sally´s argument is the substitution effect, because she proposes that an increase in the tax rate will generate the engagement of taxpayers in alternative activities, other than work, given that they will see that extra work is less valuable after tax value.

While the basis for Andrew´s argument is the income effect, because he states that increasing the tax rate will be beneficial because this increase will cause taxpayers to work more in order to be able to generate further income that balances what is lost after paying the increased rate.