To the extent that high incomes can be attributed to very high demand for very scarce abilities, the labor supply effects of a substantial increase in the tax rate
A)will be zero as long as the labor supply curve is vertical.
B)will be significant because the demand curve is fixed.
C)cannot be predicted because the substitution and income effects offset each other.
D)will be zero as long as there is no economic rent in the income.

Question

Quizplus · Accepted Answer

If the labor supply curve is vertical, it means that the quantity of labor supplied is fixed regardless of changes in the wage rate. As such, a higher tax rate will not affect the supply of labor, and the labor supply effects of the tax increase will be zero. This applies even if the income is very high and the abilities scarce, as long as the labor supply curve is vertical.

To the Extent That High Incomes Can Be Attributed to Very