Impact of Taxes on Businesses and Workers
First, watch this short video.
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Mostly summarized from Greg Mankiw’s Principles of Economics 5th Ed., chapter 6.
Per Figure 8:
At original equilibrium point C:
· wage paid by firms and received by workers is F
· quantity of workers employed is Q
· total wages paid by firms and net wages received by workers are area FCQ0
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When the payroll tax AE is levied, there are three ways to pay the tax:
1-entire tax is levied on firms
2-entire tax is levied on workers
3-tax is levied half each on firms and workers
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-1-Entire tax is levied on firms
a· firms pay E wages to workers
b· firms pay all AE taxes
c· because of higher total cost A, firms demand fewer workers Q1
d· because of lower net wages E, workers supply less labor Q1
…
-2-Entire tax is levied on workers
a· firms pay A wages to workers
b· workers pay all AE taxes
c· because of higher total cost A, firms demand fewer workers Q1
d· because of lower net wages E, workers supply less labor Q1
…
-3-Tax is levied half each on firms and workers
a· firms pay F wages to workers
b· firms pay AF taxes
c· workers receive F wages
d· workers pay FE taxes
e· because of higher total cost A, firms demand fewer workers Q1
f· because of lower net wages E, workers supply less labor Q1
…
In all three cases
· total cost to firms of each worker rises from F to A
· net wage for workers falls from F to E
· quantity of workers employed falls from Q to Q1
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In all cases with a tax, deadweight loss to economy is created.
· tax revenue ABDE goes to government
· area BCD is deadweight loss, totally lost from the economy
…
Even if a tax mostly directly is paid by firms, ultimately all taxes are paid for by the general public.
With increased business taxes and deadweight loss, results are
· less profits = less wealth creation causing decreased business investment
· smaller economy
· fewer jobs and lower wages
…
Even if area ABDE tax revenues for government are paid out to workers in benefits:
· due to compensation paid to government workers involved and natural government inefficiencies, the amount paid out to workers is somewhat less than ABDE
· there are 20 fewer workers employed now
· area BCD deadweight loss is created, money not received either by firms/workers nor government
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See Table A for example data.
(Note, first developed today, 241227, data check appreciated)
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Deadweight loss of taxation explained in this video:
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