Question

The government of the country of Burnination is trying to encourage its workers to work more. They first attempt an advertising

campaign featuring Prime Minister Trogdor yelling at the camera and calling the viewers a bunch of lazy bums whose
thatched-roof cottages should be burned to the ground. This fails miserably. Finance Minister Pom Pom suggests an alternative
policy of reducing the income tax rate.
What would you expect would be the most likely outcome of this policy?
The workers will actually work less, because lower taxes will reduce the amount of utility they get from leisure.
There will be no change in the workers' behavior, because a change in tax rate will not affect their labor-leisure
budget constraint.
The workers will work more, because the life-cycle theory of savings predicts that people work harder when taxes
are low.
Lower earning workers will work more, but higher earners will work less, because of a backward-bending supply curve
for labor.

Answer 1

Reducing income tax rates often leads to lower earners increasing their work hours due to higher take-home pay, while higher earners may work less as they have sufficient income from the tax cut to afford more leisure time.

Step-by-step explanation:

The most likely outcome of the Finance Minister Pom Pom's policy of reducing income tax rates in the country of Burnination is that lower earning workers will work more, while higher earners may work less. This is due to a phenomenon known as the backward-bending supply curve for labor. Part-time workers may respond to higher take-home wages by working additional hours to increase their income. However, individuals with higher incomes might opt to enjoy more leisure time instead, as the tax cut provides them with sufficient income without the need for extra work hours. The effect of the tax reduction on the labor supply is thus not uniform and depends on individual circumstances and preferences.