Question

For each of the following statements, do you agree or disagree? Why?

A. Economic theory predicts unequivocally that a payroll tax reduction will increase the supply of labor

B. Corporate income taxes levied on a monopolist are likely to be regressive because the monopoly can pass on its burden to consumers

C. If labor supply is relatively elastic, the burden of a payroll tax falls largely on workers

Answer 1

A, yes I agree with the statement. A payroll tax cut will increase labour supply and shifts out the aggregate supply curve . The shift in the AS curve results in lower inflation and higher output.

B, I partiality agree with the statement. Because there is no clear evidence that the monopoly passes it's burden to consumers. Ultimate burden is not nearly clear. It is likely that consumers and workers bear some of the tax. Even from the three rules of tax incidence analysis it is not clear.

C, I fully agree with this statement, when the supply curve is elastic, the demand curve is inelastic. In this case price received by sellers falls only slightly, while buyers pay more. Thus buyers bear most of the burden of payroll tax