Principles of Economics- Mankiw (5th) 163

Principles of Economics- Mankiw (5th) 163 - In each of...

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CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 169 ± Some families have second earners—often married women with children— with some discretion over whether to do unpaid work at home or paid work in the marketplace. When deciding whether to take a job, these sec- ond earners compare the benefits of being at home (including savings on the cost of child care) with the wages they could earn. ± Many of the elderly can choose when to retire, and their decisions are partly based on the wage. Once they are retired, the wage determines their incen- tive to work part-time. ± Some people consider engaging in illegal economic activity, such as the drug trade, or working at jobs that pay “under the table” to evade taxes. Econo- mists call this the underground economy. In deciding whether to work in the un- derground economy or at a legitimate job, these potential criminals compare what they can earn by breaking the law with the wage they can earn legally.
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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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