6. Who should pay the tax?
The following graph gives the labor market for laboratory aides in the imaginary country of Paideia. The equilibrium hourly wage is $10, and the equilibrium number of laboratory aides is 150.
Suppose the federal government of Paideia has decided to institute an hourly payroll tax of $4 on laboratory aides and wants to determine whether the tax should be levied on the workers, the employers, or both (in such a way that half the tax is collected from each party).
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.
0
30
60
90
120
150
180
210
240
270
300
20
18
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10
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4
2
0
WAGE (Dollars per hour)
LABOR (Number of workers)
Demand
D - Tax
Supply
S + Tax
225, 4
Graph Input Tool
Market for Laboratory Aides

Wage
(Dollars per hour)
4

Labor Demanded
(Number of workers)
300

Labor Supplied
(Number of workers)
0
Demand Shifter
Supply Shifter

Tax Levied on Employers
(Dollars per hour)
2

Tax Levied on Workers
(Dollars per hour)
2
For each of the proposals, use the previous graph to determine the new number of laboratory aides 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 laboratory aides (that is, the wage received by workers minus any taxes collected from the workers).
Tax Proposal
Quantity Hired
After-Tax Wage Paid by Employers
After-Tax Wage Received by Workers
Levied on Employers
Levied on Workers
(Number of workers)
(Dollars per hour)
(Dollars per hour)
(Dollars per hour)
(Dollars per hour)
4 0
0 4
2 2