Taxes on Labor Supply (ch 21) A. Taxation and Labor Supply - Theory 1.

Basic Theory

substitution effect:

income effect:

2. Limitations of the Theory

B. Taxation and Labor Supply ± Evidence Two general conclusions: 1.

2.

Limitations

C. Tax Policy to Promote Labor Supply: The Earned Income Tax Credit The Earned Income Tax Credit is

1. Background

2. Impact on Labor Supply: Theory The EITC has both _____________________ and ____________________ effects on labor supply decisions. Impact of EITC on 4 types of people: 1. not in labor force

2. in the labor force but earn income in the ³phase in´ portion

3. in the labor force and earn income in the ³flat´ portion

4. in the labor force and earn income in the ³phase out´ portion

3. Impact on Labor Supply: Evidence a. Tax Reform Act of 1986

b. effect on labor force participation

c. effect on hours worked

d. impact on married couples

4. EITC Reform

D. Labor Supply and the Tax Treatment of Child Care About _____% of children are cared for solely by their mothers. About _____% of children go to child care centers.

1. Tax Treatment of Child Care

2. Options for Resolving Tax Wedges Tax wedges distort behavior by ____________________________ people to undertake the untaxed activities and cause _______________________________. a. Imputing Home Earnings

b. Deductible Child Care Costs

3. Comparing the Options

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