... 1) this shows that in these circumstances tax is a disincentive to work effort. The marginal benefit of work has fallen and the taxpayer has chosen to substitute some leisure for some of his working time. The supply curve of labour is not always upward sloping it can be backward bending. In figure 2 if wages rise beyond point c, the number of hours worked falls, they may substitute some work hours for leisure. The diagram shows that an increase in tax, reduces wage rate and leads to an increase of hours worked, here the income effect is greater than the substitution effect. The taxpayer has been made worse off and having to work more hours to take home the same income before the tax was imposed. Income and substitution effects both influence work effort, though often in opposite directions, as can be seen in figures 1 and 2. Using indifference curve ...

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