TAXATION, GOVERNMENT SPENDING, AND LABOR SUPPLY A DIAGRAMMATIC EXPOSITION

The effects of a change in the level of taxation on labor supply are examined under the assumption that the government budget balances. The government spends tax revenues either on redistributions (which are assumed to have an income effect on labor supply) or on other government goods (which are assumed not to influence labor supply). In order for a rise in the tax rate to increase the quantity of labor supplied, it must be that (i) the labor-supply function bends backward, and (ii) sufficiently little of the increased tax revenues are redistributed. The quantity of labor supplied must fall if all marginal tax revenues are redistributed.