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High rates of personal income tax are thought to have a disincentive effect. This refers to the likelihood that the high rates of tax will:
A Encourage illegal tax evasion by individuals
B Lead to a reduction in the supply of labour
C Lead to a reduction in savings by individuals
D Discourage consumer spending and company investmentsHigh rates of personal income tax lead to after-tax income reduce
=> Price of labour reduce so Supply of labour reduceBut reduction of afer-tax incomeprobably lead to reduction in saving by individuals and consumer spending
Why answer is B
Please explain this to me.
Thank you very much.The question is about what will cause disincentive (presumable, disincentive to work or to earn more).
A might be true, but has nothing to do with a disincentive to work.
C might be true, but not related to disincentive – in fact it might do the reverse if people feel less secure because their saving are lower so work harder to try to build them up again.
D is true but again nothing to do with disincentives.
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