James is a 35-year-old economic consultant who eagerly anticipates the day he will retire from his job and move to a lovely, but expensive, vacation spot, complete with beachfront property and a yacht. James gets income from labor income and investment income (any money he saves can be invested), but income tax rates apply both to labor income and investment income.
Question:
Will taxes on labor income reduce or increase labor supply? Will taxes on labor income reduce or increase saving? And what about taxes on investment income – will these reduce or increase labor supply, and reduce or increase saving? Which of the two types of tax – a tax on labor income, or a tax on investment income – is likely to create more deadweight loss than the other?