1. Effect of Personal Income Taxes on Labor Supply
Anderson: Incentive Effects of Taxation

2. Introduction
The existence of taxes brings with it incentives to change behavior.
In this chapter we examine how taxes provide incentives to change behavior in three specific ways:
Labor supply
Savings
Tax evasion
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3. Five Principles Raising Adequate Revenue Neutrality Fairness
Ease of Administration and Compliance
Accountability

4. Taxation and Labor Supply
Labor-leisure choice problem.
People value both income and leisure.
In order to earn income, one must work.
The problem is to allocate time, a scarce resource, to labor and leisure.
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5. Labor-Leisure Choice Time endowment T.
Allocate time to leisure activity l or work activity T - l.
Work pays wage of w per hour.
Wage income is y = w x (T - l).
Optimal combination of labor and leisure is that where the MRS between income and leisure equals the wage.
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6. Figure 11.1: Labor/Leisure Choice
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7. Figure 11.2: Labor Supply Effects of a Wage Reduction
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9. Figure 11.3: Substitution and Income Effects of a Wage Reduction
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10. Figure 11.4: Effects of a Wage Reduction When the Income Effect Dominates
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11. Figure 11.5: The Laffer Curve
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