Answered: By law, the government splits the levy…

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

ChapterST2: The Economics Of Social Security

Section: Chapter Questions

Problem 6CQ

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Question

By law, the government splits the levy of the FICA tax equally between workers and firms.
(a) Using a supply and demand diagram, draw the labor market and label the equilibrium
wage and employment level assuming FICA did not exist. Then, on the same graph,
draw how the imposition of FICA alters labor market outcomes. Make sure to carefully
label equilibrium wages, wages paid, wages received, and employment.
(b) If the government splits the levy of the FICA tax evenly between workers and firms, then
how is it that some researchers claim that workers pay approximately 90% of payroll
taxes?
(c) Assume that labor unions lobby the government to have the entire levy of FICA shifted to
firms. Will workers ultimately be happy under this new tax structure? Why or why not?

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