Question

The following graph shows the labor market for research assistants in the fictional country of Universalia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 100. 

Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that half the tax is collected from each side). 

Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph. 

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

For each of the proposals, use the previous graph to determine the new number of research assistants hired. Then compute the after-tax amount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-tax amount earned by research assistants (that is, the wage received by workers minus any taxes collected from the workers). 

Suppose the government doesn't want to discourage employers from hiring research assistants and, therefore, wants to minimize the share of the tax paid by the employers. Of the three tax proposals, which is best for accomplishing this goal? 

• The proposal in which the entire tax is collected from workers Additional Resources 

• The proposal in which the tax is collected from each side evenly 

• The proposal in which the tax is collected from employers 

• None of the proposals is better than the others

Answer 1

Suppose that there is a tax of \(\$ 4\), levied on employers. Due to this, demand curve shifts down by \(\$ 4\), which implies employers will hire 50 workers, after-tax wage paid by employers is \(\$ 12\) and after-tax wage received by workers is \(\$ 8\)

Now a tax of \(\$ 4\) is levied on workers, so that now the supply curve shifts up by \(\$ 4\), which implies employers will hire 50 workers, after-tax wage paid by employers is \(\$ 12\) and after-tax wage received by workers is \(\$ 8\)

When a tax of \(\$ 2\) is levied each on employers and workers, demand curve shifts down and supply curve shifts up by \(\$ 2\), which implies employers will hire 50 workers, after-tax wage paid by employers is \(\$ 12\) and after-tax wage received by workers is \(\$ 8\)

Hence, we see that none of the policy does better than the other.