Question

A senator wants to raise tax revenue and make workers better off. A staff memberproposes raising the payroll tax paid by firms and using part of the extra revenue toreduce the payroll tax paid by workers. Would this accomplish the senator’s goal?Explain.

Answer 1

Answer:

This proposal will not work.

Explanation:

All taxes work the same way, it doesn't matter if they are payroll taxes or taxes on goods or services. In this case, labor is the service provided by the employees (suppliers) and the employer is the consumer. A tax increase will reduce the demand for labor, and therefore the equilibrium price of labor (wage) will also decrease. If wages decreases, then workers are not going to be better off, on the contrary they will be worse off. This tax increase will lower both the wage and the employment level.

Answer 2

Answer: The proposal will not accomplish the senator's goal

Explanation: Taxes are financial obligations or levies charged on a tax payer by the government.

When the payroll tax paid by a firm is increase, it increases the tax revenue generated by the government but it affects the wages of the workers. The wages of the workers will reduce as such the workers will not be better off as proposed.