1. Currently, the Employment Insurance payroll tax in Canada is divided between employers and employees. Employers...

1. Currently, the Employment Insurance payroll tax in Canada is divided between employers and employees. Employers must pay the government a tax of 2.56% of the wages they pay, and employees must pay 1.83% of the wages they receive. In order to make workers better off (and increase their chances of re-election) the government is considering changing the system and replacing it with a 4.39% tax on employers alone, with employees paying nothing. Would this make employees better off? Explain.

Expert Solution

Reducing the tax rates on wages or completely finishing them would not make workers better off, because the division of the burden of a tax depends on the elasticity of supply and demand and not on who must pay the tax.

On the other hand the government has increased the rate of tax which is to be paid by the employer on the wages he pays to the workers . This will reduce the surplus and ultimately at the end this will affect the wages being paid to the workers because now the employer has to pay the greater amount of taxes from his surplus and he will be left with lesser amount to be utilised in the payment of wages.

The wages are paid from the profits of the business, if the profits will get reduced by the payment of higher taxes, there will be lesser profits left for the payment of wages, the employer will pay less wages so that he does not have to pay more tax to the government now 4.39% in comparison to the 2.56%, so there are no chances that the workers will be better of or their productivity will increase.

Rahul Sunny answered 2 years ago

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