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Unformatted text preview: In each of these cases, the quantity of labor supplied responds to the wage (the price of labor). Thus, the decisions of these workers are distorted when their la-bor earnings are taxed. Labor taxes encourage workers to work fewer hours, second earners to stay at home, the elderly to retire early, and the unscrupulous to enter the underground economy. These two views of labor taxation persist to this day. Indeed, whenever you see two political candidates debating whether the government should provide more services or reduce the tax burden, keep in mind that part of the disagree-ment may rest on different views about the elasticity of labor supply and the deadweight loss of taxation. L ET ME TELL YOU WHAT I THINK ABOUT THE ELASTICITY OF LABOR SUPPLY. QUICK QUIZ: The demand for beer is more elastic than the demand for milk. Would a tax on beer or a tax on milk have larger deadweight loss? Why?...
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- Spring '10