6. Who should pay the tax? The following graph shows the labor market for resear
ID: 1105379 • Letter: 6
Question
6. Who should pay the tax? The following graph shows the labor market for research assistants in the fictional country of Academia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 250. Suppose the government has decided to institute a $2-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 half the tax is collected from each side). Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on 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 Levied on Workers field (initially set at zero dollans per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. 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. Graph Input Tool Market for Research Assistants 20 18 16 14 12 Wa 1 Sup (Dollars per hour) abor Number of workers) 400 tabor Supplieders)-100 oma nded Number of Supply Shifter Tax Levied on Dollars per hour Demand Shifter Tax Levied on Employers per hour)Explanation / Answer
When a tax of $2 is levied on employers, demand shifts down by $2, which implies employers will hire 225 workers, after tax wage paid by employers is $9 and after tax wage received by workers is $9
When a tax of $2 is levied on workers, supply shifts up by $2, which implies employers will hire 225 workers, after tax wage paid by employers is $9 and after tax wage received by workers is $9
When a tax of $1 is levied each on employers and workers, demand shifts down and supply shifts up by $1, which implies employers will hire 200 workers, after tax wage paid by employers is $9 and after tax wage received by workers is $9
Hence we see that none of the policy does better than the other.
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