Lecture 4 Labor Suppy 3 - LECTURE 4 LABOR SUPPLY 3...

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LECTURE 4 LABOR SUPPLY 3 Economics 440 Prof. Brown
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OUTLINE Taxes Transfer program Welfare EITC (Some) Lifetime labor supply and Retirement
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U.S. 2010 INCOME TAX RATES Tax Rate Married Couples Filing Jointly Most Single Filers 10% Not over $16,750 Not over $8,375 15% $16,751 - $68,000 $8,376 - $34,000 25% $68,001 - $137,300 $34,001 - $82,400 28% $137,301 - $209,250 $82,401 - $171,850 33% $209,251 - $373,650 $171,851 - $373,650 35% Over $373,650 Over $373,650
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U.S. 2010 INCOME TAX RATES Tax Rate Married Couples Filing Jointly Most Single Filers 10% Not over $16,750 Not over $8,375 15% $16,751 - $68,000 $8,376 - $34,000 25% $68,001 - $137,300 $34,001 - $82,400 28% $137,301 - $209,250 $82,401 - $171,850 33% $209,251 - $373,650 $171,851 - $373,650 35% Over $373,650 Over $373,650 Marginal tax rate: Tax on next $ earned Ex: The MTR at $150,000 for a single filer is 28% Average tax rate: The fraction of earnings paid as taxes Ex: The ATR at $150,000 is .10 8375 ൅ .15 34000 െ 8375 ൅ .25 82400 െ 34000 ൅.28 150000 െ 82400 → 34428 150000 ൌ22 .95%
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Country Single, no kids Married, 2 kids Country Single, no kids Married, 2 kids Australia 28.3% 16.0% Korea 17.3% 16.2% Austria 47.4% 35.5% Luxembourg 35.3% 12.2% Belgium 55.4% 40.3% Mexico 18.2% 18.2% Canada 31.6% 21.5% Netherlands 38.6% 29.1% Czech Republic 43.8% 27.1% New Zealand 20.5% 14.5% Denmark 41.4% 29.6% Norway 37.3% 29.6% Finland 44.6% 38.4% Poland 43.6% 42.1% France 50.1% 41.7% Portugal 36.2% 26.6% Germany 51.8% 35.7% Slovak Republic 38.3% 23.2% Greece 38.8% 39.2% Spain 39.0% 33.4% Hungary 50.5% 39.9% Sweden 47.9% 42.4% Iceland 29.0% 11.0% Switzerland 29.5% 18.6% Ireland 25.7% 8.1% Turkey 42.7% 42.7% Italy 45.4% 35.2% United Kingdom 33.5% 27.1% Japan 27.7% 24.9% United States 29.1% 11.9% Source: OECD, 2005 data
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EXAMPLE: 10% FLAT TAX Janine: w =$10/hr T = 168 hrs/wk Without a tax, she will work 40 hrs/wk Now suppose the government imposes a 10% flat tax on income. How does the tax affect her hours of work?
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EXAMPLE: 10% FLAT TAX L (hours) C ($) C*=400 U 0 ܥൌ10 168 െ ܮ ൅ 0 -10 1680 L*=128 168
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EXAMPLE: 10% FLAT TAX L (hours) C ($) C*=400 U 0 ܥൌ10ሺ1െݐሻൈ 168െܮ ൅0 -9 1680 L*=128 168 U 1 0.1 The slope is now the after-tax wage.
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EXAMPLE: 10% FLAT TAX Flat tax looks like a wage decrease $10/hr to $9/hr Problem Solving Tip: Set MRS=w(1-t) The change in hours is ambiguous Substitution effect work less Income effect work more
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EXAMPLE: 10% FLAT TAX What happens to the labor supply curve?
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This note was uploaded on 10/28/2011 for the course ECON 440 taught by Professor Brown during the Fall '08 term at University of Illinois at Urbana–Champaign.

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Lecture 4 Labor Suppy 3 - LECTURE 4 LABOR SUPPLY 3...

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