4. Who should pay the tax? The following graph shows the labor market for resear

Question

4. Who should pay the tax?

The following graph shows the labor market for research assistants in the fictional country of Collegia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 150.

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 dollars 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.

For each of the proposals, use the previous graph to determine the new number of research assistants hired. Then compute the after-tax amount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-tax amount earned by research assistants (that is, the wage received by workers minus any taxes collected from the workers).

Graph Input Tool Market for Research Assistants 20 18 16 14 12 10 Wage 4 (Dollars per hour) Labor Demanded Number of workers) Supply Labor Supplied Number of workers) 186 114 Demand Shifter Supply Shifter Tax Levied on Employers (Dollars per hour) Tax Levied on Workers (Dollars per hour) 0 0 30 60 90 120 150 180 210 240 270 300 LABOR (Number of workers)

Explanation / Answer

Answer : Table showing information as follows :

The proposal in which tax is collected from each side evently. It means that neither the employer has been suffered from tax increases nor the employee. So the tax should distrubte between the employer and employee equally and evently in systematic manner. In this way they are able to hired 145 workers.

Tax proposal Tax proposal (No of workers) After tax wages paid by employer After tax wages recieved by workers Levied on employer Levied on workers Qty Hired - - 2 0 140 $12 $10 0 2 140 $10 $8 1 1 145 $11 $9

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