Why are consumption taxes relevant for measuring the tax wedge? A tax on consumption ___________. A....

Why are consumption taxes relevant for measuring the tax wedge?

A tax on consumption ___________.

A. increases the demand for labour because people work more hours so they can afford more expensive goods

B. has no effect on the tax wedge in the labour market

C. adds to the tax wedge in the labour market because it raises the prices paid for consumption goods and services and is equivalent to a cut in the real wage rate

D. decreases the tax wedge in the labour market because it raises the prices paid for consumption goods and services and people have less incentive to buy more expensive goods, so they work fewer hours

Expert Solution

Solution: adds to the tax wedge in the labour market because it raises the prices paid for consumption goods and services and is equivalent to a cut in the real wage rate

Explanation: The taxes on consumption expenditure are relevant in measuring the tax wedge because it raises the tax wedge and also increases the price paid for consumption items and services; and therefore equivalent to reduction in the rate of real wage from the worker's perspective.

Rahul Sunny answered 3 years ago

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