Question 6 Chapter 6 Who should pay the tax?
The following graph shows the labor market for research assistants in the fictional country of Universalia. T
... [Show More] he equilibrium wage is $10 per
hour, and the equilibrium number of research assistants is 250.
Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the
tax should be levied on the employer, the workers, or both (such that each pays half the tax).
Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Paid by Employers field (initially set at zero
dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Paid by Workers field (initially
set at zero dollars per hour) shifts the supply curve up by the amount you enter. You will not be graded on any changes you make to this
graph.
Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.
For each of the proposals, use the previous graph to determine the new equilibrium wage and number of research assistants hired. Then
compute theafter-tax amount paid by employers (that is, the equilibrium wage plus any taxes the employer pays) and the aftertax amount earned by research assistants (that is, the equilibrium wage minus any taxes the worker pays).
Tax Proposal Wage Quantity Hired
Wage + Employers’s
Taxes
Wage – Workers’s
Taxes
Employers
Pay... Workers Pay...
(Dollars per
hour)
(Number of
workers)
(Dollars per hour) (Dollars per hour)
(Dollars per
hour)
(Dollars per
hour)
Points: 1 / 1
4
0
2
0
4
2 8
8
8
12
12
12
200
200
200
10
12
8
Graph InputTool
20 Market for Research Assistants
18 ply Wage
(Dollars
16
14
12
per hour)
Labor
Demanded
(Number
of
workers)
Labor
Supplied
(Number
of
workers)
10
8
Demand Shifter Supply Shifter
6
Demand
4
2
D - Tax
0
Tax Paid
by
Employers
(Dollars
per hour)
Tax
Paid by
Workers
(Dollars
per
hour)
0 50 100 150 200 250 300 350 400 450 500
LABOR (Number of workers)
Sup
0 0
4
WAGE (Dollars per hour)
Suppose the government doesn’t want to discourage employers from hiring research assistants and, therefore, wants to minimize the share
of the tax paid by the employers. Of the three tax proposals, which is best for accomplishing this goal?
The proposal in which workers pay the entire tax
The proposal in which each side pays half the tax
The proposal in which employers pay the entire tax
None of the proposals is better than the others
Points: 1 / 1
Explanation: Close Explanation
To evaluate the first proposal, enter $4 into the Tax Paid by Employers field. The new equilibrium number of workers is 200, and the
new equilibrium wage is $8 per hour. Since employers have to pay $4 on top of that wage, it costs them $12 per hour to hire a
research assistant. Since workers don’t pay any tax directly, they take home the entire $8 per hour.
To evaluate the second proposal, enter $4 into the Tax Paid by Workers field. The new equilibrium number of workers is still 200, but
now, the new equilibrium wage is $12. Since employers don’t pay any tax directly, it costs them $12 per hour to hire a research
assistant. Since workers have $4 per hour taken out of their paychecks, they take home a total of per hour after
taxes.
To evaluate the third proposal, enter $2 into the Tax Paid by Employers field and $2 into the Tax Paid by Workers field. Once again,
the new equilibrium number of workers is 200, but the new equilibrium wage is $10. Since employers have to pay $2 on top of that
wage, it costs them per hour to hire a research assistant. Since workers have $2 per hour taken out oftheir
paychecks, they take home a total of per hour after taxes.
Explanation: Close Explanation
From this exercise, you can see that the equilibrium quantity of labor, the amount employers pay per hour after the tax, and the
amount workers take home are all independent of who pays the tax. Therefore, it doesn’t matter which tax proposal the government
implements because none of the proposals is better than the others. [Show Less]
