An increase in the marginal tax rate will cause

Question

Quizplus · Accepted Answer

An increase in the marginal tax rate will have both an income and a substitution effect. The income effect is due to the fact that the individual will have less disposable income after paying the higher tax rate, which will reduce their purchasing power and their ability to consume. The substitution effect arises as the tax rate increase makes work relatively less attractive than leisure time, causing individuals to work fewer hours and to shift towards more leisure time.

An Increase in the Marginal Tax Rate Will Cause