The distribution of the $2.50 per hour income tax between workers and employers depends on market conditions, which are not provided in the question. The example of a government program reducing guaranteed income by 50% for each dollar earned illustrates the complexity of tax burdens on individuals.
- The question involves the incidence of an income tax of $2.50 an hour and requires an analysis of how it is divided between workers and employers.
- To determine how much of the tax is paid by each party, one would need additional information about the market conditions, such as the elasticity of supply and demand for labor.
- However, typically, the burden of a tax is shared between employers and workers, with the division depending on the relative elasticities.
- Referring to the government income program, where individuals guaranteed $18,000 in annual income face a 50% reduction of this guarantee for every dollar earned, it affects their net hourly income.
- If someone earns $8.00 per hour, they would actually net $4.00 per hour due to the reduction.
- This is evident in the budget constraint detailed in Figure 15.4, which has a vertical intercept of $28,000 and will differ if an income tax is introduced.