Explain Graphically That a Payroll Tax Imposed by the Government

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The Answer is In the figure given below,the supply and demand curves for labor are S and D respectively.The wage rate is $10 per hour and employment is L₁.Now suppose the government levies a payroll tax on employers,which requires them to pay $2.00 to the government for each hour of labor they employ.

In the figure given below,the supply and demand curves for labor are S and D respectively.The wage rate is $10 per hour and employment is L<sub>1</sub>.Now suppose the government levies a payroll tax on employers,which requires them to pay $2.00 to the government for each hour of labor they employ. With the tax in place,employers will still pay no more than $10.00 per hour for the quantity L<sub>1</sub>,but since they must pay $2.00 to the government,the amount that employers will be willing to pay for L<sub>1</sub> units of labor falls to $8.00 per hour.In the diagram,the effect of the tax is thus shown as a vertical shift downward by $2.00 in the demand curve to D'.The downward shift in the demand curve means that with a $2.00-per-hour tax,employers pay $2.00 less to workers at each level of employment.With the supply curve S,the tax reduces employment to L<sub>2</sub>,and the wage rate paid to workers falls to w<sub>A</sub>,or $8.50.To employers,the cost of labor including the tax is now $10.50 per hour. Alternatively,if employees pay the $2.00-per-hour tax entirely,the supply curve shifts vertically upward by $2.00,or to S_,without affecting the demand curve.The shift in supply reflects the fact that workers must receive $2.00 more per hour to yield the necessary after-tax wage to compensate them for supplying each alternative quantity of labor.Thus,the real effects of the tax are exactly the same whether the tax is collected from employers or employees.

With the tax in place,employers will still pay no more than $10.00 per hour for the quantity L₁,but since they must pay $2.00 to the government,the amount that employers will be willing to pay for L₁ units of labor falls to $8.00 per hour.In the diagram,the effect of the tax is thus shown as a vertical shift downward by $2.00 in the demand curve to D'.The downward shift in the demand curve means that with a $2.00-per-hour tax,employers pay $2.00 less to workers at each level of employment.With the supply curve S,the tax reduces employment to L₂,and the wage rate paid to workers falls to w_A,or $8.50.To employers,the cost of labor including the tax is now $10.50 per hour.
Alternatively,if employees pay the $2.00-per-hour tax entirely,the supply curve shifts vertically upward by $2.00,or to S_,without affecting the demand curve.The shift in supply reflects the fact that workers must receive $2.00 more per hour to yield the necessary after-tax wage to compensate them for supplying each alternative quantity of labor.Thus,the real effects of the tax are exactly the same whether the tax is collected from employers or employees.

Explain Graphically That a Payroll Tax Imposed by the Government

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