Suppose the government reduces marginal income tax rates and increases welfare payments. This policy combination will:

Question

Quizplus · Accepted Answer

Reducing marginal income tax rates increases the incentive to work by allowing individuals to keep more of their earnings. However, increasing welfare payments may reduce the incentive to work, as individuals might rely more on welfare benefits. The overall effect on the incentive to work is ambiguous as it depends on the relative strength of these opposing effects.

Suppose the Government Reduces Marginal Income Tax Rates and Increases