If firms’ average on-cost tax rate is 15%, the average indirect rate is 12%, the effective...

If firms’ average on-cost tax rate is 15%, the average indirect rate is 12%, the effective inflation tax is 3%, and the average direct tax rate is 20%, then the tax wedge equals:

Solutions

Expert Solution

A tax wedge is a difference between the Before-tax wedge and the After-tax wedge,

so, Tax wedge = ( Before-tax wedge - After-tax wedge)

= (average on-cost tax rate + average indirect rate) - ( effective inflation tax + average direct tax rate)

= (15% + 12%) - (3% + 20%)

= 27% - 23%

= 4%

The tax wedge equals to 4%.

Rahul Sunny answered 2 years ago

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