Homework 3 Solutions - Homework 3 Solutions 4-2 In the...

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Homework 3 Solutions 4-2. In the United States, labor supply tends to be inelastic relative to labor demand, and according to law, payroll taxes are essentially assessed evenly between workers and firms. Given the above situation, are workers or firms more likely to bear the additional burden of an increased payroll tax in the United States? Could this burden be shifted to the firms by assessing the increase in payroll taxes on just firms rather than having firms and workers continue to be assessed payroll taxes equally? As labor supply is relatively more inelastic than labor demand, workers will bear a greater percentage of payroll taxes than employers regardless of how the law stipulates the amount be split. Most estimates suggest that workers in the United States bear about 80 to 85 percent of payroll taxes. Again, tax incidence does not depend on who legally is required to pay the tax, so levying a greater percentage of payroll taxes on firms will not have any real economic effect.
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