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Public Finance for Corporate Income Tax

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Suppose the corporate income tax were eliminated and the revenue lost was made up by increasing the payroll tax rate on labor earnings. What would be the impact on labor and capital markets of such a shift in tax policy? What is the likely differential incidence of substituting a payroll tax for an equal-yield corporate income tax?

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Solution Summary

The impact on labor and capital markets of eliminating income tax is determined. The differential incidence of substituting a payroll tax for an equal-yield corporate income tax is determined.

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Impact of Payroll Tax
In the condition of payroll tax rate increment, the firm's labor cost will increase that effectively reduce the profitability of organizations. This particular shift in tax policy may hike the marginal productivity values of employees within organizations that make a pressure on the organizations to spend more money on employees. Therefore, it will reduce the number of authorized labor and will increase contract labor within organizations (Crucesa, Galianib & Kidyba, 2010). Due to high labor cost, the organizational profitability may reduce that decreases the lavel of employment. So, increment in payroll tax could reduce the net wages of employees that respectively ...

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