Question

Choose the correct statement. A. Income tax creates a deadweight loss in the markets for capital and labor. B. Income tax is a tax paid by the buyers of the services of​ labor, capital, and land. C. The inefficiency of a tax is independent of the elasticities of demand and supply.

Answer 1

Answer:

The correct answer is option A.

Explanation:

Income tax is a tax imposed by the government on the income earned by the individuals. This income can be from capital and labor. It creates a deadweight loss in the market for labor and capital.

Deadweight loss is the loss to economic efficiency and production caused by a tax. The imposition of a tax creates a tax wedge, this tax wedge leads to a deadweight loss. Deadweight loss due to income tax is the loss of purchasing power or reductions standard of living due to tax.  

The inefficiency or tax burden depends upon the elasticities of demand and supply. Whoever has the least elasticity will share most of the tax burden.