Suppose that the government wants to impose a $1/hour tax on labor hours, so it

Question

Suppose that the government wants to impose a $1/hour tax on labor hours, so it can use the proceeds to fund some unrelated public project. Suppose you are hired as a consultant by the government to advise them on whether they should tax the company $1/hour for every hour they hire, or tax the workers $1/hour from their paychecks. Which would you recommend?

In preparing your recommendation, ignore technicalities such as other existing taxes or whether it is more efficient to collect the tax revenues from the company or the individual workers. Base your answers only on the welfare implications from our supply and demand analysis, and provide explanations or justifications for your recommendation.

Explanation / Answer

Taxing the companies would lead to passing on the taxes to the consumers in the form of high prices, leading to low demand and high prices.

Taxing the laborers would lead to reduced real wages, leading to lower supply, leading to higher prices and lower sales.

In both the cases, the prices will increase, shifting the burden to consumers. So, it is better that the company be taxed, so that the laborers are atleast saved from the burden of taxes.

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