Question

If the tax elasticity of labor supply is 0.24, by how much do tax rates have to be reduced to increase the labor supply by 2 percent?

Instructions: Round your response to one decimal place (do not include a negative (-) sign with your answer).

 

 %

Answer 1

Reduction of tax rate with increase in labor supply:

Tax elasticity of supply is \(0.24\) indicates 1 percent increases tax will cause the supply to fall by \(0.16\) percent. To increase the supply by 2 percent the percent of tax rate should be cut is obtained as follows:

\(\begin{aligned} \text { Tax rate } &=\frac{\text { Supply percent }}{\text { Tax elasticity }} \\ &=\frac{0.02}{0.24} \\ &=0.083 \end{aligned}\)

Hence, tax rate have to be reduced by \(0.083\) percent to increase the supply by 2 percent.