The government raises Joe’s income tax rate, so now he pays 20 percent of his wages to the government instead of the old 10 percent.
This increase in tax rate means that personal disposable income of the Joe will decline. So, in order to maintain the same standard of living Joe will work overtime so that even after increase in tax rate he can have enough income to maintain same lifestyle as he was having before this increase in tax rate.
To earn more Joe has to work more therefore Joe’s labor supply will tend to increase as a result of the change in income tax rate.
The factor that seems to be causing the supply shift is change in taxes and subsidies.
