Deck 21: Taxes on Labor Supply

Question 1

The effect of nonlabor income on labor supply has ________; the effect of after-tax wages on labor supply has ________.

A) substitution and income effects; substitution and income effects
B) substitution effects; income effects
C) income effects; substitution and income effects
D) income effects; substitution effects

Answer 1

income effects; substitution and income effects

Question 2

Suppose that a tax is levied on wages and a woman responds by working less.Which of the following statements is TRUE?

A) The income effect causes her to buy fewer of all goods except leisure.
B) The income effect exceeds the substitution effect.
C) The substitution effect exceeds the income effect.
D) There is no income effect.

Answer 2

The substitution effect exceeds the income effect.

Question 3

Economic analysis of the relationship between taxation and work reveals that:

A) high taxes may discourage work effort,causing output and income to fall.
B) tax breaks have very little effect on the decision to work,as with the tax holiday experienced in Iceland.
C) when tax rates increase,people react by working longer hours so they will not experience a reduction in after-tax income.
D) workers actually pay very little attention to tax changes,so a tax on earnings is optimal.

Answer 3

high taxes may discourage work effort,causing output and income to fall.

Question 4

Nada Eissa's studies of the impact of the Tax Reform Act of 1986 on labor supply are an example of which type of approach to estimating the elasticity of labor supply? Hint: Eissa used the fact that the Tax Reform Act of 1986 affected very high income and moderately high income people differently.

A) random experiment
B) cross-sectional regression
C) time series
D) quasi-experiment

Question 5

Suppose that a tax is levied on wages and a woman does not change the number of hours she works.Which of the following statements is TRUE?

A) The substitution effect exceeds the income effect.
B) The income effect exceeds the substitution effect.
C) The income effect is equal to substitution effect.
D) There is no income effect.

Question 6

If the tax rate on income is given by t and the wage is given by w,what is the slope of the budget constraint?

A) -w + t
B) w - t + 1
C) w(t - 1)
D) w(1 - t)

Question 7

Which statement is TRUE in the standard model of labor supply?

A) If the income effect dominates the substitution effect,higher wages lead to a reduction in the quantity of labor supplied.
B) If the substitution effect dominates the income effect,higher wages lead to an increase in the quantity of labor supplied.
C) Higher wages always lead to a reduction in the quantity of labor supplied.
D) Higher wages always lead to an increase in the quantity of labor supplied.

Question 8

If the tax rate on income is given by t and the wage is given by w,what is the slope of the indifference curve at the optimal choice? (Assume that the person is not at a corner of the budget constraint.)

A) the slope of the indifference curve depends on preferences.
B) w - t + 1
C) w(t - 1)
D) w(1 - t)

Question 9

Cross-sectional regression analyses that identify the effect of taxes on labor supply may be biased because:

A) people who earn high wages may have a higher preference for work than do people who earn low wages.
B) people who earn low wages may have a higher preference for work than do people who earn high wages.
C) all people used in such studies work the same number of hours.
D) everyone receives the same amount of utility from leisure time.

Question 10

In the standard labor supply model,the vertical axis shows _____ and the horizontal axis shows _____.

A) hours worked; consumption/income
B) consumption/income; hours of leisure
C) hours of leisure; hours of work
D) consumption/income; wage

Question 11

The estimates of the effect of wages on labor supply,from the study of a negative income tax system run by President Lyndon B.Johnson's Office of Economic Opportunity between 1968 and 1976,is an example of what type of empirical analysis?

A) random experiment
B) cross-sectional regression
C) time series
D) quasi-experimental

Question 12

If a person responds to a tax on wages by working the same number of hours,then the:

A) substitution effect exceeds the income effect.
B) substitution effect induces the individual to work more.
C) income effect exceeds the substitution effect.
D) income effect exactly offsets the substitution effect.

Question 13

If the payroll tax were to be lowered,empirical evidence suggests that:

A) secondary earners would work more hours.
B) primary earners would work fewer hours.
C) labor force participation among secondary workers would be reduced.
D) worker hours remain unchanged.

Question 14

If the payroll tax were increased,the empirical evidence suggests that:

A) secondary earners would work more.
B) primary earners would work more.
C) secondary earners would change their hours worked more than would primary earners.
D) primary earners would change their hours worked more than would secondary earners.

Question 15

Suppose that a tax is levied on wages and a person responds by working more.Which of the following statements is TRUE?

A) The after-tax wage is the effective price of leisure.
B) The substitution effect induces the person to work more.
C) The income effect induces the person to work less.
D) The substitution effect is offset by the income effect.

Question 16

If a person responds to a tax on wages by working more,then the:

A) substitution effect exceeds the income effect.
B) substitution effect induces the individual to work more.
C) income effect exceeds the substitution effect.
D) income effect exactly offsets the substitution effect.

Question 17

The Earned Income Tax Credit subsidizes the wages of:

A) all families with children.
B) hourly workers only.
C) low-income earners.
D) high-income earners.

Question 18

Which statement about the Earned Income Tax Credit (EITC)is NOT true?

A) Most of the benefits of the EITC go to families making less than $30,000.
B) The EITC is refundable.
C) The EITC has grown significantly since it was first introduced.
D) The EITC reduces tax liabilities only for families paying high taxes.

Question 19

Which statement best describes the current Earned Income Tax Credit (EITC)program?

A) As earnings increase from zero,the EITC increases at a decreasing rate until it reaches the maximum.
B) As earnings increase from zero,the EITC increases at a constant rate until it reaches the maximum.
C) As earnings increase from zero,the EITC increases and then decreases until it is zero.
D) As earnings increase from zero,the EITC decreases at a constant rate until it is zero.

Question 20

If the tax rate on income is given by t and the wage is given by w,what is the after-tax wage?

A) w - t
B) w - t + 1
C) w(t - 1)
D) w(1 - t)

Question 21

The textbook discusses a paper by Nada Eissa and Jeffrey Leibman that examines the effect of the Earned Income Tax Credit on the single mother labor supply.The paper addresses the fact that some expansions of the program were modest for families with only one child but much larger for families with two or more children.Thus,the researchers used a difference-in-difference strategy to compare the labor supply of single mothers with two or more children with the labor supply of single mothers with only one child.
(a)What type of empirical strategy is this?
(b)What is the study group (or treatment group)and what is the control group?
(c)Suppose that over this period,employers become more willing to hire and accommodate single mothers.Would this fact bias the estimates? Explain.

Question 22

Which statement is NOT true about the structure of the Earned Income Tax Credit (EITC)?

A) Up to a threshold,EITC pays a certain fixed percent of wage earned.
B) EITC pays a fixed amount at a range of income.
C) At a particular range of income,government reduces EITC payments based on a lower fixed percent of income earned.
D) EITC payments decrease as earnings increase,but everyone qualifies for some amount.

Question 23

Empirical evidence suggests that the Earned Income Tax Credit (EITC):

A) does not affect men's labor supply.
B) reduces the labor supply of married women.
C) has significantly increased hours of work for those in the labor force.
D) has not caused workers to enter the labor force.

Question 24

For someone who is not working at all without the Earned Income Tax Credit (EITC),which statement is true when the person is subject to the EITC,once he starts working?

A) The income effect of the EITC induces the person to work more.
B) The substitution effect of the EITC induces the person to work more.
C) There is no substitution effect.
D) There is no income effect.

Question 25

For someone who is receiving a wage subsidy:

A) the effect of the program on labor supply is ambiguous.
B) the substitution effect induces the person to work less.
C) the income effect induces the person to work more.
D) income and substitution effects do not apply.

Question 26

Discuss fundamental labor supply elasticity differences with respect to after-tax wages of primary earners and secondary earners.

Question 27

Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse cares for two children and if employed would earn $20 per hour for 40 hours per week.The total cost of child care would be $10 per hour for 50 (not 40)hours per week.Assume that the marginal tax rate on work is 50%.Assume that child care is NOT tax deductible and that child care at home is NOT imputed and taxed.What is the after-tax,after-child-care value of working per week?

A) -$100
B) $0
C) $150
D) $300

Question 28

Which statement about the estimated effects of the Earned Income Tax Credit (EITC)on labor supply is TRUE?

A) The 1986 expansion of the EITC did not increase the labor market participation of single mothers.
B) The 1986 expansion of the EITC did not affect the number of hours worked by those already in the labor force.
C) The 1986 expansion of the EITC reduced the number of hours worked by those in the labor force.
D) Researchers were not able to study the effects of the 1986 expansion of the EITC.

Question 29

Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse currently cares for two children and,if employed,would earn $20 per hour for 40 hours per week.The cost of child care would be $15 per hour for 40 hours per week.Assume that child care is tax deductible and that child care at home is NOT imputed and taxed.Assume that the spouse is indifferent between working and staying home except for the financial impact.What would be the marginal tax rate such that the spouse is indifferent between entering the labor force and providing child care at home?

A) 0%
B) 25%
C) 50%
D) 100%

Question 30

Suppose the spouse of the primary earner in the household is considering joining the labor force.The spouse currently cares for two children and,if employed,would earn $20 per hour for 40 hours per week.The cost of child care would be $10 per hour for 50 (not 40)hours per week.Assume that the marginal tax rate on work is 50%.Assume that child care is tax deductible and that child care at home is NOT imputed and taxed.What is the after-tax,after-child-care addition to family income of the spouse working each week?

A) $100
B) $0
C) $150
D) $300

Question 31

Suppose a researcher identifies the effect of the Earned Income Tax Credit (EITC)on the labor supply of single mothers by comparing the labor supply of those mothers after the EITC expansion with the labor supply of single women without children before and after the EITC expansion.Which of the following statements would cause the estimates from such a study to be biased?

A) Single women without children tend to work more hours than do single women with children.
B) Preferences regarding work among single women with children change over time.
C) Single women with children have higher income requirements for their larger family than do single women without children.
D) Preferences regarding work among single women with children remain the same over time.

Question 32

Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse cares for two children and if employed would earn $20 per hour for 40 hours per week.The total cost of child care would be $10 per hour for 50 (not 40)hours per week.Assume that the marginal tax rate on work is 50%.Assume that child care is NOT tax deductible and that child care at home is imputed and taxed.How much more would the government collect in tax revenues if the spouse chose to join the labor force rather than stay at home?

A) -$100
B) $0
C) $150
D) $300

Question 33

For persons who earn an amount of income such that the Earned Income Tax Credit (EITC)benefit is neither increased nor reduced as they work more,which statement is TRUE?

A) The effect of the EITC on labor supply is ambiguous.
B) The effect of the EITC is to increase labor supply.
C) The EITC does not have a substitution effect.
D) The effect of the EITC is to decrease labor supply

Question 34

Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse cares for two children and if employed would earn $20 per hour for 40 hours per week.The total cost of child care would be $15 per hour for 40 hours per week.Assume that child care is NOT tax deductible and that child care at home is NOT imputed and taxed.Assume that the spouse is indifferent between working and staying at home except for the financial impact.What would be the marginal tax rate such that the spouse is indifferent between entering the labor force and providing child care at home?

A) 0%
B) 25%
C) 50%
D) 100%

Question 35

Discuss the two major limitations of the basic theory of taxation's effect on labor supply.

Question 36

The substitution effect of child care expenditures induces parents to _________; the income effect of child care expenditures induces parents to __________.

A) work more; work more
B) work more; work less
C) work less; work less
D) work less; work more

Question 37

For persons who earn an amount of income such that the Earned Income Tax Credit (EITC)benefit is reduced as they work more,which statement is TRUE?

A) The effect of the EITC on labor supply is ambiguous.
B) The substitution effect induces these persons to work less.
C) The income effect induces these persons to work more.
D) There are no income or substitution effects.

Question 38

Suppose a researcher identifies the effect of the Earned Income Tax Credit (EITC)on the labor supply of single mothers by comparing the labor supply of those mothers to the labor supply of single women without children before and after the EITC expansion.This is an example of which type of empirical strategy?

A) cross-sectional regression
B) randomized experiment
C) quasi-experiment
D) structural estimation

Question 39

Suppose that as a policy maker,you have three options for expanding the Earned Income Tax Credit (EITC)using a given increase in your budget.
Option 1: Increase the compensation rate in the phase-in portion of the EITC schedule.
Option 2: Increase the maximum tax credit a person can receive.
Option 3: Lower the rate of reduction in the phase-out portion of the EITC schedule.
(a)Suppose that the goal of your agency is to increase the size of the labor force.Which option would meet this goal in the most cost-effective manner? Explain.
(b)Suppose that you chose Option 2.Explain in terms of income and substitution effects how your choice would affect someone who is on the phase-out portion of the EITC schedule.

Question 40

Which statement about the Earned Income Tax Credit (EITC)is TRUE?

A) The credit is the same size for all recipients regardless of the size of the family.
B) The credit is refundable.
C) The credit is only refundable for high-income individuals.
D) The EITC has had no significant effect on labor force participation or work effort.

Question 41

(a)What can cause a tax wedge in the market for child care that puts market work at a disadvantage?
(b)The text described two ways the government can remove this tax wedge.Identify them and discuss the advantages and disadvantages of both.