Analyzing the Effects of Tax Rate Changes for Families with Different Incomes. The Tax Reform Act of 1986 cut the tax rates sharply for high-income earners. Consider the families in the top 1 percent...

Analyzing the Effects of Tax Rate Changes for Families with Different Incomes. The Tax Reform Act of 1986 cut the tax rates sharply for high-income earners. Consider the families in the top 1 percent of all families ranked in terms of income. Before the law was passed, a woman in this group faced a marginal tax rate (the tax rate applied to the last dollar she earned) of 52 percent on average. After the law was passed, the rate fell to 38 percent. The decreases in tax rates were much less, however, for families with lower levels of income. According to a study by Professor Nada Eissa,2 after the decrease in taxes took effect, the labor supply of women in the highest income group increased more than that of women in other income groups. Use a labor demand and supply model to illustrate the differences between the high-income group and the other groups.