For decreases in wage taxes, substitution effects put negative pressure on tax revenues while wealth effects put positive pressure on tax revenues.
Answer the following statement true (T) or false (F)
False
Rationale: Decreases in wage taxes cause increases in after-tax wages -- and increases in wages cause substitution effects that cause increases in work hours. If people work more, then this causes upward pressure on tax revenue, not negative pressure. At the same time, the wealth effect from higher wages suggests people will work less (assuming leisure is a normal good) -- pushing in the opposite direction.
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