Division of Output Among Firms, Workers, and Government Under Taxation
Taxes alter the distribution of total output per worker (). The portion of output available to be shared between the firm and the worker is reduced by both direct () and consumption () taxes to . From this reduced amount, the firm takes a profit share of , and the worker receives a wage share of . The remaining portion of the total output, which is not distributed to the firm or worker, is collected by the government as tax revenue.
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Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
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Invariance of the WS Curve with the Real Post-Tax Consumption Wage
Definition and Significance of the Real Post-Tax Consumption Wage
Price-Setting Curve from the Firm's Perspective (Gross Wage)
When adapting the standard wage-setting (WS) and price-setting (PS) model to analyze the effects of taxation, economists plot both curves against the 'real post-tax consumption wage'. Why does this specific adaptation cause the PS curve to be reformulated and shift, while the WS curve's position remains fundamentally unchanged?
Impact of a VAT Increase on the Price-Setting Curve
Stability of the Wage-Setting Relationship in Tax Analysis
To analyze the impact of taxes, the price-setting relationship, which is initially based on the firm's costs (gross wage and producer price), must be reformulated to be expressed in terms of the real post-tax consumption wage (). Arrange the following algebraic steps in the correct logical sequence to derive the final price-setting curve used for tax analysis.
Rationale for Adapting the WS-PS Model for Tax Analysis
When adapting the standard model of wage and price determination to analyze the effects of taxes, different variables and relationships are affected in specific ways. Match each component with its correct description in the context of this adaptation.
In an economy where labor productivity is 1.5 units, firms set prices to achieve a 20% profit share on costs, the direct tax rate on wages is 10%, and the indirect tax rate on consumption is 5%, the real post-tax consumption wage implied by the price-setting relationship is ____ units. (Round your answer to two decimal places).
Evaluating a Tax Policy Shift
An economist is analyzing the effects of a new income tax within the standard wage-setting (WS) and price-setting (PS) framework. They decide to plot both relationships against the real gross wage (the firm's real labor cost) on the vertical axis. What is the primary conceptual flaw in this analytical approach?
Definition of Real Post-Tax Consumption Wage ()
Definition of Direct Taxation ()
In the wage-setting (WS) and price-setting (PS) framework, when the model is adapted to analyze taxes by using the real post-tax consumption wage as the key variable, the PS curve shifts. This shift occurs because firms' fundamental price-setting decisions are directly based on the real post-tax consumption wage their employees receive.
Impact of Taxes on the Division of Output in the WS-PS Model
Division of Output Among Firms, Workers, and Government Under Taxation
Learn After
Calculating Post-Tax Shareable Output and Government Revenue
Calculating Output Distribution with Taxes
In an economy, the total output produced per worker is divided among firms (as profits), workers (as wages), and the government (as tax revenue). If the government increases the direct tax rate on income, holding all other factors constant, what is the immediate impact on the portion of total output available to be shared between firms and workers?
In an economy where the government imposes both direct and consumption taxes, a firm's total profit, expressed as a fraction of the total output per worker, is equal to the firm's designated profit share (σ).
Calculating Government Tax Revenue from Output
A country's economic analysts determine that the total cost of a representative basket of consumer goods was $500 in the designated base year. In the following year, the total cost for the exact same basket of goods fell to $450. Based on this data, the price index for the following year would be greater than 100.