Income taxes result in allocative inefficiency because most people would work the same number of hours per year regardless of their hourly wage.

Question

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Income taxes may create disincentives to work for some individuals, especially those with lower incomes who would face a higher tax burden as they earn more income. This can lead to a reduction in labor supply and a loss of allocative efficiency as some workers who would have been willing to work at a lower wage are discouraged from doing so. However, it is not true that most people would work the same number of hours per year regardless of their hourly wage. In fact, people often respond to changes in their effective wage (after taxes) by adjusting their labor supply.

Income Taxes Result in Allocative Inefficiency Because Most People Would