Suppose you want to test the hypothesis that higher income taxes make people wor

Question

Suppose you want to test the hypothesis that higher income taxes make people work fewer hours per year on average. The tax rate is your independent variable and hours worked per year is your dependent variable and you want to use each individual country as an observation. Suppose you run your regression and find that people in countries with higher income taxes work more hours per year. What is a potential reason why that could happen? what is the problem in testing the original hypothesis in this way?

Explanation / Answer

Hypothesis :- High tax make people work for less hours per year on an average
Dependent Variable :- Hours worked per year
Independent Variable :- Tax Rate
Here, we are looking into different countries which means we have cross sectional data.
Result obtained from regression :- In high tax countries, people work for more number of hours which contradicts our null hypothesis or the hypothesis.
Potential Reason :- High income tax means people have high income. In order to earn high income people need to work for long hours which is true . So, our hypothesis initially is incorrect.
Problem testing hypothesis :- Hypothesis is rejected by the regression results . The number of variable being tested as independent variable is less. It should include more variables to make results look better. For eg, we can segregrate countires into 3 parts like developing countries, developed countries and transistional countries.

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