Question

A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers.
This arrangement would most likely make workers worse off because the tax wedge would be larger.
A) True
B) False

Answer 1

Answer:

A) True

Explanation:

The tax wedge is the difference between an employee's gross income versus his/her net income after taxes. The higher the tax wedge, the more expensive it is to hire employees.

High tax wedges discourage employment, because it increases the total labor cost and when the cost of any good or service increases, the quantity demanded decreases.