In July 2015, Britain’s finance minister, George Osborne, pledged to tackle tax evasion, ease the tax burden on workers, and lift the threshold on the 40 percent tax bracket (known as “Tory cuts”). According to Osborne, this measure would mean that around 29 million people would pay less tax. By raising the threshold on certain tax brackets, the take-home pay for some workers, especially those from the middle-class, would increase. The purpose, in part, was to encourage work and increase the supply of labor.
Households would respond the way the minister hoped, but only if income effects were stronger than substitution effects. Do you agree or disagree? Explain your answer.