Tuesday, April 27, 2010

Payroll Tax Increases

The USA Today reported that in the beginning of 2010, that 36 states increased payroll taxes. Thinking about the impact of a payroll tax, as the tax increases, we see a number of adverse effects. One is that firms have an incentive to reduce the number of employees (i.e. increases unemployment). A second is that if the demand curve for labor is more elastic than the supply curve for labor - that employees face the greater burden of the increase in the tax.

Both of these combined result in a decline in economic welfare, which is typical for a tax.

1 comment:

sturgeom said...

Dr. Stacy,

How do you feel about this whole Goldman Sachs fiasco? Are synthetic CDOs legitimate products that make markets more efficient, or are they just funneling money to a select few who know how to game the system.
Although much of what Goldman Sachs did was illegal, I feel as if they exploit people using their intelligence and extensive market information to 'out-wit' and outsmart more oblivious firms and people.
What are your thoughts? Are these investment banks creating a rational economic system or are they really creating disequilibriums that wouldn't otherwise exist?