Empirical work suggests that labor demand is very elastic while labor supply is very inelastic. Assume too that payroll taxes are about 15% and legislated to be paid half by the employee and half by the employer.
(a) What would happen to worker wages if payroll taxes were eliminated?
(b) What would happen to employment costs paid by firms if payroll taxes were eliminated?
(c) What would happen to producer and worker surplus if payroll taxes were eliminated? Which measure is relatively more sensitive to payroll taxes? Why?
(d) Why might workers not want payroll taxes eliminated?