Answer to Question #291279 in Microeconomics for Naman

Question

A senator wants to raise tax revenue and make work-

ers better off. A staff member proposes raising the

payroll tax paid by firms and using part of the extra

revenue to reduce the payroll tax paid by workers.

Would this accomplish the senator’s goal? Explain

Answer 1

This would not achieve the senator's objectives since the burden of a tax is determined by supply and demand elasticity.

The tax rate is determined by the SD price elasticity. Consumers bear the brunt of the tax burden when supply is more elastic than demand. When demand is more elastic than supply, the tax burden falls mostly on the producers. The more inelastic supply and demand are, the higher the tax revenue.