Question

The federal government currently levies a 15.3 percent payroll tax (7.65 percent on both the employer and employee) on the wages of all workers. If the demand for laboris relatively elasti when compared to the inelastic supply of labor, the burden of this tax will a. be divided equally between employees and employers b. Its impossible to tell from this information c. fall primarily on employees d.tall primarily on employers.

Answer 1

Answer:

c. fall primarily on employees

Explanation:

As the demand for labor is elasticc (if the business is not profitable will close) while the supply of labor more inelastic (worker had to work to sustain their living standards) the burden of taxation while in fact is assumed to be distributed equally what occurs is that labor is decrease to make the total cost (base wage plus taxes) the amount the employeer are willing to pay for the employee

Answer 2

Answer:

C) fall primarily on employees

Explanation:

The cost of taxes is always shared equally between suppliers and sellers, since it increases the price paid by the buyers and decreases the money received by the suppliers. But that doesn't mean that both sides are hurt equally.

Generally the side whose price elasticity is more inelastic, will suffer the most from taxes. In this case, the suppliers of labor are households, while the consumers of labor are the businesses. Since the price elasticity of supply is lower (elastic), then that means that the suppliers will suffer the most.

Since the bargaining power of businesses is much greater than the bargaining power of workers, they have the advantage of setting the terms of employment. Unless there is a shortage of employment (excess demand), businesses will always set terms that favor them over the workers. So even though the taxes will be paid by both, workers and businesses, the businesses will simply lower the wages to compensate for their higher costs.