Question

Suppose that there are currently no income taxes, but a tax of $4/hour is under consideration. (Note that this is a little different from how income taxes usually work - it is a fixed dollar amount per hour rather than a percentage of wages. It will be easier to work with this specifixation.) As it is, employees hire 250 billion hours of labor services per year at an average wage of $15/hour, but if the tax passes employment will be reduced to 225 billion hours per year and wages BEFORE taxes are assessed will rise to $18/hour.

a. If the tax passes, what will be the new wage net of the income tax?

b. How much revenue will the tax generate for the government?

c. Compute the elasticity of labor supply and labor demand.

d. Compute the deadweight loss due to the tax. [Hint: Assume that the supply and demand curves are straight lines. The formula for the area of a triangle is Area = 0.5 x (height).]

Answer 1

A 18/hour as given in question itself.

B 4(225 billion)=9oo billion. Tax rate multiplied by hours of labour

C see fig

D see fig