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Consider the following two statements: 1) If the government raises marginal income tax rates on society, and then rebates the tax revenue back to households, economic theory predicts very strongly that this will reduce labor supply. 2) If the government raises your marginal income tax rates and uses the money in a way that does not affect you in any way, economists do not know what will happen to labor supply. Can these two statements both be true? describe. (Hint: your answer should contain the terms "income effect" and "substitution effect.")

Microeconomics, Economics

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