Economics of Public Issues (20th Edition) (The Pearson Series in Economics)
Economics of Public Issues (20th Edition) (The Pearson Series in Economics)
20th Edition
ISBN: 9780134531984
Author: Roger LeRoy Miller, Daniel K. Benjamin, Douglass C. North
Publisher: PEARSON
Question
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Chapter 23, Problem 1DQ
To determine

The effects of payroll taxes on decision making.

Expert Solution & Answer
Check Mark

Explanation of Solution

  • The payroll taxes are paid by the employees in any form either explicitly in the form of deduction or implicitly in the form of lower salaries.
  • With the fall in the wage rate, the price of leisure decreases and according to the economic principle, with the fall in the price of a commodity, the demand for that commodity increases.
  • Considering leisure a normal commodity, fall in the wage rate will result in an increase in the demand for leisure. The negative substitution effect and the positive income effect will decide whether the demand for leisure will increase or decrease with payroll taxes.
  • According to the effect of payroll taxes, if the substitution effect is stronger than the income effect, then workers will demand more leisure and less work. But if the income effect is stronger than the substitution effect, then workers will demand more work and less leisure.
Economics Concept Introduction

Concept Introduction:

The taxes that are paid by the employer from the employee’s salary or are deducted from the employee’s salary are known as payroll taxes. These taxes are imposed based on the amount of salary paid.

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