An increase in the income tax rate leads to a large increase in deadweight loss if ________.

Question

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If the labor supply curve is highly elastic, it means that workers are very responsive to changes in the wage rate (which is affected by income tax). Therefore, an increase in income tax will lead to a large decrease in the after-tax wage rate, causing many workers to reduce their hours worked or drop out of the labor force altogether. This high responsiveness leads to a large deadweight loss, as the loss in output from the reduced labor supply outweighs the revenue raised from the higher tax rate.

An Increase in the Income Tax Rate Leads to a Large