Although the size of the labor tax is easy to determine, the deadweight loss
of this tax is less straightforward. Economists disagree about whether this 50
percent labor tax has a small or a large deadweight loss. This disagreement
arises because they hold different views about the elasticity of labor supply.
Economists who argue that labor taxes are not very distorting believe that
labor supply is fairly inelastic. Most people, they claim, would work full-time
regardless of the wage. If so, the labor supply curve is almost vertical, and a tax
on labor has a small deadweight loss.
Economists who argue that labor taxes are highly distorting believe that labor
supply is more elastic. They admit that some groups of workers may supply
their labor inelastically but claim that many other groups respond more to incentives
of this tax is less straightforward. Economists disagree about whether this 50
percent labor tax has a small or a large deadweight loss. This disagreement
arises because they hold different views about the elasticity of labor supply.
Economists who argue that labor taxes are not very distorting believe that
labor supply is fairly inelastic. Most people, they claim, would work full-time
regardless of the wage. If so, the labor supply curve is almost vertical, and a tax
on labor has a small deadweight loss.
Economists who argue that labor taxes are highly distorting believe that labor
supply is more elastic. They admit that some groups of workers may supply
their labor inelastically but claim that many other groups respond more to incentives
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