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    Effects of differential taxation of inputs

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    1. In 2003, Hong Kong levied a tax of $51 per month on employers of domestic helpers from other nations. Many of these workers were from the Philippines, and President Arroyo of that country called the tax "unjust and unfair". Given that the tax was levied on employers, was President Arroyo correct in being disturbed? Sketch a model that is consistent with her concerns being justified.

    3. Some countries rely relatively heavily on taxes that distort economic behavior, and other do not. A recent econometric study found that countries in the latter category tend to grow faster than countries in the former. Use the discussion surrounding Figure 13.9 to explain this phenomenon. (The title of the graph is Excess burden of differential taxation of inputs).

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    Solution Preview

    1. The technical term for President Arroyo's concern is "tax incidence." Tax incidence describes the distribution of the tax burden. When employers are taxed, some or all of the tax may eventually be passed on to employees in the form of lower wages. In terms of the value of marginal product, or the dollar value of the additional input produced from an hour of work, the efficiency of the workers declines. Assuming ...

    Solution Summary

    Effects of differential taxation of inputs. How deadweight loss affects economic growth.