6. Who should pay the tax?

The following graph gives the labor market for laboratory aides in the imaginary country of Paideia. The equilibrium hourly wage is $10, and the equilibrium number of laboratory aides is 150.

Suppose the federal government of Paideia has decided to institute an hourly payroll tax of $4 on laboratory aides and wants to determine whether the tax should be levied on the workers, the employers, or both (in such a way that half the tax is collected from each party).

Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

030609012015018021024027030020181614121086420WAGE (Dollars per hour)LABOR (Number of workers)DemandSupply

Graph Input Tool

Market for Laboratory Aides
	Wage (Dollars per hour)
	Labor Demanded (Number of workers)			Labor Supplied (Number of workers)

Demand Shifter	Supply Shifter
	Tax Levied on Employers (Dollars per hour)			Tax Levied on Workers (Dollars per hour)

For each of the proposals, use the previous graph to determine the new number of laboratory aides hired. Then compute the after-taxamount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-taxamount earned by laboratory aides (that is, the wage received by workers minus any taxes collected from the workers).

Tax Proposal	Quantity Hired	After-Tax Wage Paid by Employers	After-Tax Wage Received by Workers
Levied on Employers	Levied on Workers	(Number of workers)	(Dollars per hour)	(Dollars per hour)
(Dollars per hour)	(Dollars per hour)
4	0
0	4
2	2

Suppose the government is concerned that laboratory aides already make too little money and, therefore, wants to minimize the share of the tax paid by employees. Of the three tax proposals, which is best for accomplishing this goal?

The proposal in which the entire tax is collected from workers

The proposal in which the tax is collected from each side evenly

The proposal in which the tax is collected from employers

None of the proposals is better than the others