Illustrate what effect does the income tax have consumption

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Suppose that the government imposes a proportional income tax on the representative consumer's wage income. That is, the consumer's wage income is w*(1-t)*(h-l) where t is the tax rate and h is the total hours that consumer has and l denotes the leisure. Illustrate what effect does the income tax have on consumption and labor supply? Explain your results in terms of income and substitution effects thoroughly.

Reference no: EM1352969

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