A government proposal to increase marginal tax rates on the wealthiest 1 percent of U.S. residents is supposed to generate an additional $200 billion in tax revenues. It is likely that

Question

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The proposal to increase marginal tax rates on the wealthiest 1 percent may lead some of them to respond by working less and earning less income that can be taxed. This is called the substitution effect, where individuals work less when the after-tax reward for working reduces due to higher taxes. Therefore, the actual revenue raised may be less than the projected $200 billion. Option A is incorrect because it assumes that everyone will increase work effort, which may not be the case. Option B is incorrect because it is not necessarily true that the short-run aggregate supply curve is upward sloping for the labor market. Option D is incorrect because the wealthy do respond to work incentives, albeit in different ways than poorer workers.

A Government Proposal to Increase Marginal Tax Rates on the Wealthiest