If the tax elasticity of labor supply is 0.24, by how much do tax rates have to be reduced to increase the labor supply by 2 percent?
Instructions: Round your response to one decimal place (do not include a negative (-) sign with your answer).
%
Reduction of tax rate with increase in labor supply:
Tax elasticity of supply is \(0.24\) indicates 1 percent increases tax will cause the supply to fall by \(0.16\) percent. To increase the supply by 2 percent the percent of tax rate should be cut is obtained as follows:
\(\begin{aligned} \text { Tax rate } &=\frac{\text { Supply percent }}{\text { Tax elasticity }} \\ &=\frac{0.02}{0.24} \\ &=0.083 \end{aligned}\)
Hence, tax rate have to be reduced by \(0.083\) percent to increase the supply by 2 percent.
If the tax elasticity of labor supply is 0.24, by how much do tax rates have to be reduced to increase the labor supply by 2 percent?
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