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Chapter 9: Problem 13

Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a tax of 6.2 percent of the wages they pay, and employees must pay 6.2 percent of the wages they receive. Suppose the tax were changed so that employers paid the full 12.4 percent and employees paid nothing. Would employees be better off?

Short Answer

Expert verified
Employees would not necessarily be better off if employers were responsible for the entire social security payroll tax, as the employers might offset the higher tax burden by reducing wages, causing the employees to indirectly bear the burden.

Step by step solution

01

Understand the Current Situation

Currently, both the employer and the employee are paying an equal percentage (6.2%) of the wages as the social security payroll tax. Therefore, the total tax amounts to 12.4% of the wages of an employee.
02

Analyzing the Proposed Scenario

If the tax were changed such that employers paid the full 12.4% and employees paid nothing, at the first glance, it appears that employees would be better off since they no longer need to pay the tax. However, it's crucial to understand that employers might compensate for their increased tax burden.
03

Understanding Tax Incidence

The idea of tax incidence reveals that the person who technically pays the tax is not always the one who bears its burden. Employers could offset the higher tax burden by lowering the wages they provide to the employees. Hence, even though the employees aren't directly paying their part of the tax, they may still end up bearing the burden indirectly if their wages are reduced.
04

Conclusion

Therefore, even though initially it appears the employees would be better off if they didn’t have to pay the tax directly, they might not necessarily benefit in the overall picture, because the burden of the tax may still fall on them indirectly if employers decide to reduce wages to compensate for the higher tax burden.

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Most popular questions from this chapter

From time to time, Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of lowskilled labor is given by \\[ L^{s}=10 w \\] where \(L^{5}\) is the quantity of low-skilled labor (in millions of persons employed each year), and \(w\) is the wage rate (in dollars per hour). The demand for labor is given by \\[ L^{D}=80-10 w \\] a. What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of \(\$ 5\) per hour. How many people would then be employed? b. Suppose that instead of a minimum wage, the government pays a subsidy of \(\$ 1\) per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be?

In \(1983,\) the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let's consider the wheat market: a. Suppose the demand function is \(Q^{D}=28-2 P\) and the supply function is \(Q^{S}=4+4 P\), where \(P\) is the price of wheat in dollars per bushel, and \(Q\) is the quantity in billions of bushels. Find the freemarket equilibrium price and quantity. b. Now suppose the government wants to lower the supply of wheat by 25 percent from the freemarket equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollarshence the name of the program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers? How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose? c. Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?

The domestic supply and demand curves for hula beans are as follows: \\[ \begin{aligned} \text {Supply:} & P=50+Q \\ \text {Demand:} & P=200-2 Q \end{aligned} \\] where \(P\) is the price in cents per pound and \(Q\) is the quantity in millions of pounds. The U.S. is a small producer in the world hula bean market, where the current price (which will not be affected by anything we do) is 60 cents per pound. Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers, domestic producers, and government revenue from the tariff.

Suppose the market for widgets can be described by the following equations: \\[ \begin{array}{cl} \text { Demand: } & P=10-Q \\ \text { Supply: } & P=Q-4 \end{array} \\] where \(P\) is the price in dollars per unit and \(Q\) is the quantity in thousands of units. Then: a. What is the equilibrium price and quantity? b. Suppose the government imposes a tax of \(\$ 1\) per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of \(\$ 1\) per unit granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?

In Exercise 4 in Chapter 2 (page 84 ), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of \(\$ 9\) per pound. U.S. domestic supply and demand for various price levels are shown in the following table $$\begin{array}{|ccc|} \hline & \text { U.S. SUPPLY } & \text { U.S. DEMAND } \\ \text { PRICE } & \text { (MILLION POUNDS) } & \text { (MILLION POUNDS) } \\ \hline 3 & 2 & 34 \\ \hline 6 & 4 & 28 \\ \hline 9 & 6 & 22 \\ \hline 12 & 8 & 16 \\ \hline 15 & 10 & 10 \\ \hline 18 & 12 & 4 \\ \hline \end{array}$$ Answer the following questions about the U.S. market: a. Confirm that the demand curve is given by \(Q_{D}=40-2 P,\) and that the supply curve is given by \(Q_{s}=2 / 3 P\) b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds. c. If the United States imposes a tariff of \(\$ 3\) per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss? d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of the fiber? What is the gain for U.S. producers?
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