If the substitution effect is larger than the income effect,a decrease in tax rates will lead to an increase in the labor supply.

Question

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When the substitution effect (the incentive to work more due to higher wages) is stronger than the income effect (the incentive to work less due to increased leisure), a decrease in tax rates leads to an increase in the labor supply. This is because individuals are more willing to work longer hours to take advantage of higher after-tax wages.

If the Substitution Effect Is Larger Than the Income Effect,a