Final answer:
The substitution effect refers to consumers consuming less of a higher-priced product and seeking cheaper alternatives, not to taxpayers working harder due to increased tax rates, making the original statement false.
Step-by-step explanation:
The statement that the substitution effect predicts that taxpayers will work harder to pay for consumer products when tax rates increase is false. The substitution effect actually relates to consumers choosing to consume less of a product whose price has increased, and instead consuming more of a relatively cheaper substitute. When it comes to the effect of higher taxes on labor supply, some workers might work more to maintain their after-tax income, but others may not. In fact, the leisure-income budget emphasizes that not all workers respond to tax cuts or tax increases in the same way. Some may work more, some the same, and some even less, particularly if their income is already high. These effects are part of broader economic considerations, including ones such as supply-side economics, which suggests tax cuts can incentivize people to work more, potentially leading to greater tax revenue despite the lower tax rate.