a. An economist estimates that a tax on labor income has had no effect on the la

Question

a. An economist estimates that a tax on labor income has had no effect on the labor supply of affected taxpayers (in other words, affected taxpayers work the same amount of hours after the tax is imposed as they did before the tax was imposed). He therefore concludes that the excess burden of the new tax is zero. Do you agree? Why or why not? (Hint: the information given is telling you that the uncompensated labor supply curve is perfectly inelastic.)
b. Another economist estimates that a new tax on labor income has had no effect on the wage received by workers. He argues that since workers received the same wage before and after the tax is imposed, there is no excess burden. Do you agree? Why or why not?

Explanation / Answer

a. An economist estimates that a tax on labor income has had no effect on the labor supply of affected taxpayers (in other words, affected taxpayers work the same amount of hours after the tax is imposed as they did before the tax was imposed). He therefore concludes that the excess burden of the new tax is zero. Do you agree? Why or why not? (Hint: the information given is telling you that the uncompensated labor supply curve is perfectly inelastic.)
b. Another economist estimates that a new tax on labor income has had no effect on the wage received by workers. He argues that since workers received the same wage before and after the tax is imposed, there is no excess burden. Do you agree? Why or why not?

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