Municipalities in Belgium levy surtaxes on the personal income tax payable by their residents. Rates vary from
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Municipalities in Belgium levy surtaxes on the personal income tax payable by their residents. Rates vary from \(0 \%\) to \(9 \%\), with the average rate being about \(7 \%\). Suppose the rate of surtax on wage income is initially \(5 \%\) in two neighboring municipalities; one municipality then increases the rate of its surtax to \(9 \%\). What effect would this tax increase have on the equilibrium wage and on employment in the total labor market, the higher tax municipality, and the lower tax municipality?
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