Topic 7: Income Taxation and Labour Supply

Question 1

Progressive income tax

Answer 1

One where the marginal tax rate is always increasing in income

Question 2

Regressive income tax

Answer 2

One where the marginal tax rate is always decreasing in income

Question 3

Proportional income tax

Answer 3

One where the marginal tax rate is fixed independent of income

Question 4

Extensive margin

Answer 4

Whether to work or not (captures movement in and out of the labour market)

Question 5

Intensive margin

Answer 5

Hours of work (captures variation in work conditional on being in the labour market)

Question 6

Objective of consumer when deciding labour supply

Answer 6

max U(c,l) s.t. c=(1-t)wL+R

Question 7

Slope of BC for consumers with leisure and consumption on axis

Answer 7

(1-t)w

Question 8

Marginal tax rate

Answer 8

T’(z) - individual keeps [1-T’(z)] for an additional $1 of earnings (intensive labour supply response)

Question 9

Participation tax rate

Answer 9

tp=[T(z)-T(0)]/z - individual keeps 1-tp of earnings when moving from zero earnings to earnings of z (extensive labour supply response)

Question 10

Break-even earning point

Answer 10

z* - point at which T(z*)=0