Principles of Economics- Mankiw (5th) 128

Principles of Economics- Mankiw (5th) 128 - 132 PA R T T W...

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132 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK acronym for the Federal Insurance Contribution Act. The federal government uses the revenue from the FICA tax to pay for Social Security and Medicare, the income support and health care programs for the elderly. FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers. In 1999, the total FICA tax for the typical worker was 15.3 percent of earnings. Who do you think bears the burden of this payroll tax—firms or workers? When Congress passed this legislation, it attempted to mandate a division of the tax burden. According to the law, half of the tax is paid by firms, and half is paid by workers. That is, half of the tax is paid out of firm revenue, and half is deducted from workers’ paychecks. The amount that shows up as a deduction on your pay stub is the worker contribution. Our analysis of tax incidence, however, shows that lawmakers cannot so easily distribute the burden of a tax. To illustrate, we can analyze a payroll tax
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