Question
Use the leisure-consumption model to show how a proportional tax on earnings can lead a consumer to work more in the presence of the tax.
Use the leisure-consumption model to show how a proportional tax on earnings can lead a consumer to work more in the presence of the tax. Now, the government introduces an income support program that pays a consumer $Y if they do no work. If they work and earn income while on the benefit their benefit is reduced by $1 for every $1 earned until the benefit is exhausted (100% taxback rate). For simplicity assume that dollars earned that replace dollars of benefit are not subject to the tax on earnings. Draw the new budget line facing the consumer and show that the income support program may induce the consumer to leave the workforce and rely solely on the support program.
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