Suppose a country’s government is concerned about growing inequality of incomes and wants to undertake a program that will increase the total earnings of the unskilled.

It is considering two alternative changes to its current payroll tax, which is levied on employers as a percentage of the first $100,000 of employee earnings:

a. Extending employer payroll taxes to all earnings over $100,000 per year and increasing the cost of capital by eliminating certain tax deductions related to plant and equipment.

b. Reducing to zero employer payroll taxes on the first $30,000 of earnings but continuing the payroll tax on all employee earnings between $30,000 and $100,000 (there would be no taxes on earnings above $100,000).
Analyze proposal a and proposal b separately (one, but not both, will be adopted). Which is more likely to accomplish the aim of increasing the earnings of the unskilled? Why?