2- The impact of payroll tax cut - [30 points, 10 points each] [Hint: apart from the week 7 material, read the Deadweight loss debate on page 162-163 of the book before answering] The most important taxes in the US economy is tax on labor. The Social Security tax, the Medicare tax, and the federal income tax are payroll taxes (see the budget infographics for more information). For a typical worker, if all forms of labor taxes are added together, the marginal tax rate the tax on the last dollar of earning - is about 40 percent. a- Use a labor supply and demand diagram to show that a labor tax places a wedge between the wage that firms pay and the wage that worker receive, and causes unemployment. On your graph show the deadweight loss and the tax revenue caused by tax. b- Assume that most workers work fulltime regardless of the wage; and employers have access to cheap machines. Show that in this situation, the workers benefit relatively more from a payroll tax cut. C- Assume that most workers work fulltime regardless of the wage; and labor unions play a strong role in the economy. Furthermore, assume that the initial tax rates are not considered too high on the Laffer curve. Show that in this situation, a payroll tax cut should accompanied with either a spending cut on Social Security and Medicare, or by increasing budget deficit, or both