Which of the following statements about the income effect of an income tax rate increase is true?
A) The income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers.
B) The income effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner.
C) The income effect motivates individuals to find ways to increase their before-tax income.
D) Both the income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers and the income effect motivates individuals to find ways to increase their before-tax income are true.

Question

Quizplus · Accepted Answer

The income effect of an income tax rate increase is theoretically stronger for low-income taxpayers than for high-income taxpayers because a larger proportion of their income is taken up by taxes. Additionally, the income effect motivates individuals to find ways to increase their before-tax income, as they seek to offset the reduction in after-tax income caused by the tax increase. Therefore, both statements are true.

Which of the Following Statements About the Income Effect of an Income