Question

In: Statistics and Probability

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.


Related Solutions

As unearned income rises within the standard labor/leisure model, it has a predictable effect on hours...
As unearned income rises within the standard labor/leisure model, it has a predictable effect on hours of work and the consumption of leisure. Use a graph to show this effect. Explain the graphical system in your answer.
A researcher would like to determine whether a new tax on cigarettes has had any effect...
A researcher would like to determine whether a new tax on cigarettes has had any effect on people’s behavior. During the year before the tax was imposed, stores located in rest areas on the state thruway reported selling an average of µ = 410 packs per day with σ = 60. The distribution of daily sales was approximately normal. For a sample of n = 9 days following the new tax, the researcher found an average of M = 386...
Tax on labor income - Consider a one-period economy where the representative consumer has a utility...
Tax on labor income - Consider a one-period economy where the representative consumer has a utility function u(C;L) over consumption C and leisure L. Assume preferences satisfy the standard properties we assumed in class. The consumer has an endowment of one unit of time. She earns the wage w per unit of labor supplied to the market and has wealth A which yields an interest rate r, so her income is partly coming from labor, partly from capital. Suppose that...
Explain the effect of various tax rates and tax rate changes on deferred income taxes.
Explain the effect of various tax rates and tax rate changes on deferred income taxes.
Explain the effect of various tax rates and tax rate changes on deferred income taxes.
Explain the effect of various tax rates and tax rate changes on deferred income taxes.
3. (a) The income effect of a wage rate increase will labor supply, and the substitution...
3. (a) The income effect of a wage rate increase will labor supply, and the substitution effect of a wage rate increase will labor supply. A. increase B. decrease C. not change Therefore, the total effect of a wage rate increase on labor supply is . A. positive B. negative C. ambiguous (b) Increasing the overtime wage rate is often considered as an effective way to increase employees working time during a relatively short period, such as one week. Explain...
Does a correlation between hours of work and non-labor income measures the income effect? Explain.
Does a correlation between hours of work and non-labor income measures the income effect? Explain.
When the tax on wage income rises, hours worked will increase if the ___________________ effect is greater than the _______________________ effect.
When the tax on wage income rises, hours worked will increase if the ___________________ effect is greater than the _______________________ effect. Fill in the blanks and explainintuitively each of these effects. Feel free to draw a diagram if you think it will help yourexplanation. (10 points)
Tax Rates. Lillian, a single taxpayer, had the following income and deductions for the tax year...
Tax Rates. Lillian, a single taxpayer, had the following income and deductions for the tax year 2018: INCOME: Salary $ 90,000 Business Income 24,000 Interest income from taxable bonds 8,000 Tax-exempt bond interest 4,100 TOTAL INCOME 126,100 DEDUCTIONS: Business expenses $ 9,000 Itemized deductions 15,000 TOTAL DEDUCTIONS 24,000 a. Compute Lillian’s taxable income and federal tax liability for 2018 (round to dollars). b. Compute Lillian’s marginal, average, and effective tax rates. c. For tax planning purposes, which of the three...
An Earned Income Tax Credit will Select one: A. create only an income effect. B. increase...
An Earned Income Tax Credit will Select one: A. create only an income effect. B. increase the wage rate of some low-wage workers to a rate which is above the reservation wage. C. increase the reservation wage of low-wage workers. D. create only a substitution effect
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT