a . An economist estimates that a tax on labor income has had no effect on...

a . An economist estimates that a tax on labor income has had no effect on the labor supply of affected taxpayers (in other words, affected taxpayers work the same amount of hours after the tax is imposed as they did before the tax was imposed). He therefore concludes that the excess burden of the new tax is zero. Do you agree? Why or why not? (Hint: the information given is telling you that the uncompensated labor supply curve is perfectly inelastic.)
b. Another economist estimates that a new tax on labor income has had no effect on the wage received by workers. He argues that since workers received the same wage before and after the tax is imposed, there is no excess burden. Do you agree? Why or why not?

Solutions

Expert Solution

A) Disagree. Since the amount of work hours remain the same but tax reduces the income, so income per work hour is reduced which creates the burden.

B) Agree. If the workers get the same salary before and after tax, it is equal for them but employer have to pay more income which creates burden on him.

orchestra answered 2 years ago

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