Concerned about growing inequality of incomes

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Reference no: EM13771688

Suppose a country's government is concerned about growing inequality of incomes and wants to undertake a program that will increase the total earnings of the unskilled. It is considering two alternative changes to its current payroll tax, which is levied on employers as a percentage of the first $117,000 of employee earnings:

a) Extending employer payroll taxes to all earnings over $117,000 per year and increasing the cost of capital by eliminating certain tax deductions related to plant and equipment.

b) Reducing to zero employer payroll taxes on the first $50,000 of earnings but taxing employers on all employee earnings between $50,000 and $117,000 (there would be no taxes on earnings above $117,000). Analyze proposal (a) and proposal (b) separately (one, but not both, will be adopted). Which is more likely to accomplish the aim of increasing the earnings of the unskilled? Why?

Reference no: EM13771688

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